Leveraged finance (LevFin) issuance across the US and European institutional loan and high-yield (HY) bond markets fell 22% year-on-year (YoY) to USD 814bn-equivalent in the first half of 2025, as tariff-induced volatility dampened primary activity at the start of the second quarter. However, LevFin markets subsequently recovered from the turmoil that followed the US President’s 2 April Liberation Day announcement, finishing the quarter with a proliferation of issuance.

Primary loan and bond issuance came to a virtual standstill in the immediate aftermath of the reciprocal tariff announcement. Harsher-than-expected rates, including 20% on the European Union (EU) and 64% on China, triggered a sell-off across global capital markets and a sharp widening in credit spreads until Trump announced a 90-day tariff reprieve for non-retaliating countries on 9 April. Although broader financial markets rallied on the news, escalating trade tensions between the US and China continued to stoke uncertainty until the two countries reached an agreement in May to temporarily lower taxes.

The tariff reprieve and better-than-expected macroeconomic indicators, which started emerging in May, calmed some previous fears over an impending economic downturn and rising inflation, reviving investor appetite for risk. LevFin market activity started picking up the pace, while collateralised loan obligation (CLO) issuance also bounced back and inflows into HY funds resumed.

Strong investor demand and tightening spreads fuelled LevFin issuance throughout June. Despite the eruption of the Israel-Iran conflict and subsequent US strikes on Iranian nuclear facilities, buyside appetite remained unscathed. Books closed several times oversubscribed, while many issuers brought their financing plans forward to take advantage of a strong technical backdrop.

HY issuance regains strength as loan volumes lag previous quarter

In the US, HY bond issuance totalled USD 69bn in 2Q25 across 71 transactions, marking a 27% jump on USD 54bn transacted in 1Q25. The market roared with action in May and June, more than making up for lost ground during the tariff-induced doldrums in April. Compared with the previous year, issuance was 9% higher in 2Q25, though it fell 6% short of the USD 131bn raised in 1H24.

Despite regaining momentum after the April pause, institutional loan issuance in the US slumped to USD 100bn across 126 deals in 2Q25 from USD 353bn booked in 1Q25, bringing 1H25 volume down 37% YoY. Tariff-related volatility had a more profound impact on gross volume, as repricing exercises that boosted 1Q25 issuance lay dormant for most of the second quarter. Nevertheless, repricing activity resurfaced in June, as investor demand outpaced supply, pushing a larger percentage of secondary loan prices above par.

In Europe, HY bond issuance surged to USD 57bn across 109 deals in 2Q25, more than doubling from USD 27bn in 1Q25, with 1H25 volume up 11% YoY. As tariff concerns moved into the rearview, market activity boomed to record monthly levels, with June’s HY issuance alone matching the entire volume of the preceding quarter. A strong technical backdrop lured issuers to accelerate their financing ahead of potential volatility that could accompany the 9 July tariff-reprieve deadline.

Similarly, issuers flocked to the European leveraged loan market to take advantage of tightening spreads, with a record volume of deals launching in the last two weeks of June, while repricing transactions also boosted monthly volume. Despite the uptick, institutional loan issuance was down 47% quarter-on-quarter (QoQ), with USD 54bn raised across 76 deals in 2Q25. However, 1H25 volume rose 25% YoY to USD 156bn.

New-issue pricing pulls back after April spike

Pricing rose in April as tariff shocks reverberated through credit markets, with many issuers deciding to pull or postpone syndication. Those that stayed in the market had to widen pricing, such as B2/B rated Apleona, whose EUR 2bn buyout loan cleared at Euribor+ 425 basis points (bps) and 98 original issue discount (OID) versus pre-Liberation Day guidance of E+ 375bps-400bps and 99.5 OID.

Loan margins and OIDs started tightening towards their previous lows once investors shifted back into risk-on mode. In Europe, the weighted average margin stood at 387bps at the end of June, up from 355bps at end-March, but below 402bps in 4Q24. In the US, the average margin rose to 336bps at end-June from 325bps in the first quarter and 330bps at end-December 2024.

In June, the European Central Bank (ECB) announced an eighth consecutive interest-rate cut, lowering the deposit rate to 2.25% from 2.5%. The US Federal Reserve (Fed) left benchmark rates unchanged at 4.25%-4.50% at its June meeting, though policymakers still project two rate cuts later in the second half of the year.

Pricing on new HY issues widened slightly above the levels at the start of the year, but remained close to the lowest levels since 2022. In the US primary market, the weighted average yield inched up to 7.8% from 7.7% in the previous two quarters. In Europe, it stood at 6.7% at June-end, up from 6.1% in 1Q25 and 6.5% in 4Q24.

Secondary yields tighten to pre-Liberation Day levels

US trade policy sent secondary HY bond and loan markets on a rollercoaster ride in April. While there was no forced selling, credit spreads widened over 100bps, shooting through the 400bps barrier in the week that followed Liberation Day, while there was also notable yield dispersion for issuers that would be most impacted by tariffs, such as the auto sector.

In the HY market, the weighted average yield peaked at 8.5% in the US and 6.3% in Europe before the 90-day tariff-break was announced on 9 April. As investor sentiment improved, yields tightened back towards pre-Liberation Day levels, coming in at 6.8% in the US and 5.22% in Europe.

Secondary loan prices followed a similar pattern, with weighted average bids hitting lows of 92.95 in the US and 92.46 in Europe in early April before gradually tightening to 94.98 and 94.54, respectively, by the end of June.

Refinancing dominates though new money edges up

Refinancing activity continued to drive LevFin issuance in the first half of 2025, although the new-money offering ticked up in the second quarter as several jumbo deals backing leveraged buyouts (LBOs), mergers & acquisitions (M&A), and dividend recapitalisation cleared the market. These included loan and bond financing for 3G Capital’s buyout of footwear retailer Skechers, the merger of Everi and International Game Technology’s unit, and urban services provider Urbaser’s dividend recap.

The April turmoil steered some M&A/LBO deals in the making away from bank underwriters and broadly syndicated markets, as private-equity (PE) buyers turned to direct lenders for certainty of deal execution. However, the Liberation Day dislocation was short-lived, with underwriting flexes reverting to normal levels and liquidity again running high across both syndicated and private credit markets.

In Europe, M&A/LBO financing totalled USD 19bn in 1H25, but despite increasing 15% YoY, it accounted for only 8% of total institutional loan and HY bond issuance. Refinancing, repayments and recaps churned out USD 187bn or 82% of the total, and general corporate purposes (GCP) made up the remaining 10% of volume, with USD 22bn raised.

In the US, M&A/LBO financing represented 20% of the total, hauling in USD 118bn during 1H25. Refinancing, repayments and recaps made up 68% of 1H25 issuance, but fell 43% YoY to USD 409bn, while USD 70bn was raised for GCP.

CLO issuance rebounds

Collateralised loan obligation (CLO) machines resumed printing after a brief pause in April, with spreads retracing post-Liberation Day widening. However, loan spreads tightened faster than triple-A tranches, eating into the CLO arbitrage. Triple-A tights on recent benchmark issues were at 130bps in the US and low-130s in Europe, around 5bps and 10bps wider than their respective levels at the end of March.

In the US, new CLO issues totalled USD 90bn in 1H25, down from USD 103bn raised during the same period last year. Refinancing and reset activity was the strongest in 1Q25 as USD 95bn cleared the market, whereas only USD 39bn cleared in 2Q25. Reissues totalled USD 965m, with no deals in the second quarter.

In Europe, CLO issuance moved back on track for another record-breaking year, buoyed by increased demand from US investors, with EUR 27bn clearing during 1H25. Refinancing and reset activity slowed in the second quarter at EUR 5.8bn versus EUR 9.4bn in 1Q25. Reissues featured in 1Q25 only, totalling EUR 300m.

Popular sectors: technology leads US volume, healthcare dominates in Europe

The technology sector (computers & electronics) continued to dominate LevFin volumes in the US, hauling in USD 131bn in 1H25. Professional services came in second place with USD 40bn, followed by the financial sector with USD 39bn. Healthcare and construction occupied fourth and fifth place, with volumes of USD 37bn and USD 30bn, respectively.

In Europe, healthcare topped the charts with USD 36bn, while the tech sector trailed with USD 31bn. Professional services took third place with USD 28bn, while the telecoms and construction sectors churned out USD 19bn and USD 12bn, respectively.