European loans: Built for what comes next

The European macro outlook has weakened since the start of 2026, leaving both future inflation and growth more uncertain. The Iran conflict pushed energy costs higher, the International Monetary Fund (IMF) revised eurozone growth down to 1.1%, and energy-driven inflation has put European Central Bank (ECB) hikes back on the agenda.¹ For credit investors, these crosscurrents demand assets whose structural features can deliver across multiple scenarios. European leveraged loans – a broadly syndicated market now comparable in size to European high yield, with deep secondary liquidity – offer three such advantages.

Rate insurance: income that adjusts to the policy path

European loans pay a floating coupon, typically referenced to three-month EURIBOR plus a credit spread. With EURIBOR at 2.17% and the Western European Leveraged Loan Index (WELLI) 3-year discount margin at 496 basis points, the all-in coupon on a representative European loan is approximately 7.1%.¹ That income is not trivial – it provides a meaningful carry cushion through periods of volatility.

The ECB cut rates eight times between June 2024 and June 2025, bringing down the deposit facility rate from 4.00% to 2.00%, and has held rates steady since.¹ But the rate path has shifted. Energy-driven inflation following the Iran conflict has put hikes back on the agenda – overnight index swap (OIS) markets price a 78% probability of a hike at the June meeting, with roughly two-and-a-half cumulative hikes implied by early 2027, though a terminal rate of approximately 2.6% would be far from extreme.¹ There is no guarantee these hikes will materialise. But that uncertainty is precisely the point.

For loan investors, the floating-rate structure provides insurance: if the ECB hikes, EURIBOR rises and every loan coupon adjusts upward automatically – the opposite of fixed-rate bonds, where higher rates mean capital losses. If rates stay on hold, investors continue to earn the current all-in yield of approximately 7.1%. Either way, the spread component – at 496 basis points, the majority of the return – is unaffected. In an environment where the direction of rates is genuinely uncertain, floating-rate exposure removes the need to take a view. What remains is pure credit risk – the spread that compensates investors for the borrower’s fundamentals. For managers focused on the single-B segment, this is a meaningful advantage: the return on a loan portfolio is driven entirely by credit selection and the strength of issuers’ balance sheets, not by the direction of policy rates.

Defensive positioning: lower cyclicality where it counts

European loans have historically exhibited lower return volatility than high yield bonds, despite carrying lower average credit ratings (the loan index is predominantly single-B rated, versus a more even BB/B split in high yield). In 2022, when rising rates punished fixed income broadly, European loans declined 3.3% on a total return basis while eurozone high yield fell 11.7% – a gap of more than 800 basis points.² The explanation is structural: floating-rate coupons compress the range of return outcomes, and the CLO-dominated investor base – with reinvestment mandates that sustain buying through sell-offs – limits the procyclical redemption dynamics that amplify bond market volatility.

Sector composition reinforces the defensive tilt. Applying Janus Henderson’s proprietary gross domestic product (GDP) sensitivity classifiers – which categorise 79 Bloomberg subsectors into non-cyclical, semi-cyclical, and highly cyclical buckets based on earnings sensitivity to economic growth – the contrast between the two markets is stark. Approximately 57% of the European loan market by market value falls into the non-cyclical category (healthcare, business services, food and beverage, telecom, gaming), compared with just 20% of the European high yield bond market. Conversely, 51% of EU high yield sits in highly cyclical sectors (consumer discretionary, autos, chemicals, basic industry), versus 25% for loans.³

Figure 1: Sector cyclicality composition, EU loans vs EU high yield (as at 23 April 2026)

Source: S&P/UBS (WELLI sector composition), ICE BofA HPIC constituents. Cyclicality mapping based on Janus Henderson Investors’ proprietary GDP sensitivity framework applied to Bloomberg subsector classifications. As at 23 April 2026. Weights may vary over time.

This is not coincidental. Private equity sponsors – who originate the vast majority of leveraged loans – deliberately target businesses with predictable, recurring cash flows that can service debt through economic cycles. The resulting index composition favours healthcare, technology services, and commercial services over capital-intensive, commodity-sensitive, or consumer-discretionary sectors. In an environment where macro visibility is limited, both the structural mechanics and the underlying sector composition of the loan market favour a more predictable return profile.

Adequate compensation: loans at fair value, bonds at decade-tights

There is a striking divergence in where spreads sit relative to their own history. The WELLI 3-year discount margin of 496 basis points is near its 10-year median of 494, sitting at the 52nd percentile. By contrast, European high yield at 296 basis points of OAS is at the 10th percentile of its 10-year range. US high yield, at 285, is at the 6th percentile.⁴

Put simply, a higher percentile means a wider spread – and more income for the same underlying credit risk. At the 52nd percentile, European loans are priced near the middle of their 10-year range: investors are being adequately compensated for the risk they are taking. High yield at the 10th percentile is the opposite – spreads have compressed to levels rarely seen in the past decade, leaving investors with significantly less yield for comparable credit. For active managers, the loan market offers the ability to buy fundamentally sound issuers at spreads that still reflect genuine value.

Figure 2: 10-year spread percentile by asset class (as at 21 April 2026)

Source: Bloomberg, S&P/UBS (WELLI, USLLI), ICE BofA (EU = HPIC, US = H0A0). Percentiles calculated by Janus Henderson Investors using 10 years of data ending 21 April 2026. 3Y DM = 3-year discount margin. OAS = option-adjusted spread. The bigger the spread percentile the wider the spread levels, so a rank of 1st would imply very tight spreads and a rank of 100th very wide spreads. Spreads may vary over time. 

This is where the credit isolation advantage becomes tangible. On a rating-adjusted basis, the single-B segment – where most actively managed loan portfolios are concentrated – is where the opportunity set is richest. EU loan 3-year DMs range from 351 at B1 to 407 at B2 to 629 at B3, a dispersion of 278 basis points within a single rating tier. That dispersion is not noise; it reflects genuine differentiation in credit quality that active managers can exploit.⁵

Comparing across instruments at the sub-rating level makes the point clearly. At B1, loans offer a 3-year DM of 351 versus an OAS of 252 on equivalently rated high yield bonds – a premium of roughly 100 basis points for a senior, secured position. At B2, loans at 407 sit above HY bonds at 365, a 42 basis point pickup. At B3, loans at 629 exceed HY at 587, a premium of 42 basis points. Across the single-B spectrum, loans consistently offer wider compensation for a higher position in the capital structure.⁵ Loans are uniformly senior secured, and historically have delivered higher recovery rates in default. High yield bonds, by contrast, are a mix of secured and unsecured obligations – and the unsecured portion, which makes up the majority of the market, has historically recovered materially less.

Figure 3: Sub-rating spread comparison, EU loans vs EU high yield (as at 21 April 2026)

Source: S&P/UBS (WELLI by rating, 3-year discount margin), ICE BofA HPIC constituents (option-adjusted spread by Moody’s sub-rating), Janus Henderson Investors, as at 21-23 April 2026. Spreads may vary over time.

BB-rated loans also offer a meaningful premium – 112 basis points over BB high yield bonds – though this segment represents a smaller share of typical loan portfolios. The wider story is that across every rating bucket, European loans offer comparable or wider spreads than high yield bonds, with the structural advantages of seniority and floating-rate income on top.

Average dollar prices provide an additional angle. European loans currently trade at an average clean price of approximately 95.5.⁵ The discount to par means loan investors stand to capture price appreciation as loans pull to par at maturity or are refinanced. For a total return investor, this embedded upside complements the carry advantage.

These spread levels are underpinned by a structural demand base with no direct equivalent in flow-driven markets. Collateralised loan obligations account for approximately 65% of demand for European leveraged loans.⁶ During a CLO’s reinvestment period – typically four to five years – the manager must deploy cash flows from maturing or prepaying loans back into new collateral, regardless of market sentiment. European CLO new issuance reached a record high in 2025, with Deutsche Bank forecasting €65 billion for 2026.⁷ That pace held through the first quarter despite broader market volatility, as the economics of new deals – the spread earned on loan collateral versus CLO funding costs – remained comfortably positive.⁷ Sustained CLO issuance translates directly into sustained demand for loans, providing a floor under secondary prices and helping explain why loans have typically performed relatively well during risk-off periods.

Selectivity remains the differentiator

The case for European loans rests on three pillars: floating-rate income that provides insurance against an uncertain rate path, a sector composition that skews defensive in a weakening macro environment, and spread levels that offer adequate compensation where high yield does not. But the current spread range from 351 basis points at B1 to 629 at B3 – a dispersion of 278 basis points within single-B alone – underscores how much credit selection matters.⁵ An active, bottom-up approach is, in our view, necessary to capture these structural advantages while avoiding names where compensation does not adequately reflect the risk. The question for allocators is not whether the outlook is uncertain. It is whether the assets they hold are structured to withstand that uncertainty. European loans, selected carefully, in our view, offer a credible answer.

Collateralised Loan Obligations (CLOs) are debt securities issued in different tranches, with varying degrees of risk, and backed by an underlying portfolio consisting primarily of below investment grade corporate loans. The return of principal is not guaranteed, and prices may decline if payments are not made timely or credit strength weakens. CLOs are subject to liquidity risk, interest rate risk, credit risk, call risk and the risk of default of the underlying assets.

Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.