Investors Feel Squeezed as Junk Loan Market Hits Stumbling Blocks

As summer nears, a surge in junk loan activity has heated up the market to the point that investors are starting to show signs of caution. After a period of rapid issuance and ultra-tight pricing, the leveraged loan space appears to be hitting a wall, with some buyers becoming more selective and resisting deals that no longer offer attractive returns.

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Private equity firms have been behind much of the recent wave of loan issuance, aiming to refinance or restructure the debt of their portfolio companies. High demand from investors — particularly those hungry for mergers and acquisitions opportunities — initially allowed borrowers to push down interest costs by as much as 75 basis points on some offerings. But the momentum is beginning to slow, especially among collateralized loan obligation (CLO) managers, who are the primary buyers of leveraged loans.

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“There’s only so much room for tighter pricing before it no longer works for investors,” said Sabrina Fox of Fox Legal Training, a specialist in leveraged finance. According to Fox, the current pricing environment highlights how much influence CLO investors now have in shaping the leveraged finance market, and that influence is likely to grow.

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With spreads sitting at multi-year lows, some investors are beginning to pull back, leading to more pricing discipline and increased scrutiny. That could result in a drop in deal volumes, particularly as the market enters the traditionally slower summer months.

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One sign of the changing sentiment came late last week when German medical diagnostics firm Synlab canceled a €1 billion ($1.2 billion) loan repricing effort, according to a Bloomberg report. Although no official explanation was given, market participants suggested that investors — faced with a flood of deals — have grown fatigued and more selective. The initial pricing proposal of 325-350 basis points over Euribor was seen as too aggressive.

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Synlab’s cancellation followed recent repricings by Santé Cie, a home healthcare company, and Gerflor, a flooring manufacturer. Both ended up pricing at 350 basis points, which is at the wider end of their respective discussions. While these spreads are still tight by historical standards, they represent a shift from the trend just weeks ago. At that time, firms like Presidio Inc., ITP Aero, and Group.One were able to finalize deals at the tightest ends of their guidance ranges.

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According to several market insiders, the wave of new offerings in recent weeks meant some deals were rushed through before investors could fully analyze them with complete investment committee reviews. That window may be closing, as investors now have the time and motivation to be more selective.

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Spreads are hovering near five-year lows, prompting investors to tighten their standards. As of June 30, average spreads for Single-B rated term loan B offerings stood at 393 basis points. While that’s up from the April low of 359 basis points (before Trump’s tariff threats), it remains among the tightest since early 2020.

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“We’re seeing stronger-performing loans trade near the narrowest historical spreads across rating categories,” said Brian Gelfand, co-head of global credit at TCW Group.

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Bankers note that CLO managers, in particular, are hesitant to accept spreads of just 325 basis points on Single-B rated loans. Their business model — which involves bundling loans and selling them as bond-like products — struggles to remain profitable at that pricing. To meet their operating costs and provide returns to investors, CLOs typically need spreads closer to 350-375 basis points.

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If investors continue to resist tight pricing, companies may need to reassess whether trimming just 25 basis points from their current borrowing costs is worth the time, fees, and effort required to refinance their debt, said several market sources.

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Signs of investor caution are also showing up in the secondary market. In Europe, prices on the Morningstar European Leveraged Loan Index fell to 97.61 cents on the euro as of July 4, down from 98.06 in June. In contrast, U.S. secondary prices have climbed to a four-month high of 97.30 cents on the dollar, reflecting stronger sentiment stateside.

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Despite this return of selectivity, the market still has significant capital that needs to be deployed. Most deals are still closing successfully — albeit sometimes with slightly less aggressive pricing than originally hoped.

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Several firms are continuing to pursue cross-border repricing efforts ahead of the summer lull. For instance, enterprise software company Suse SA launched a dual-currency deal this week, targeting 350 basis points on its euro-denominated term loan and 300-325 basis points on the U.S. dollar portion.

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“We’re still in a very strong market,” said Fabian Ansorg, co-head of European Leveraged Finance Capital Markets at Bank of America. “The volume of money flowing into these deals is substantial. It’s not necessarily a lack of investment appetite — it’s more of a fatigue from processing so many deals so quickly.”

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