Rising European leveraged loan yields cast shadow over private credit

A spike in European leveraged loan yields and spread widening are starting to “cloud the outlook” for private credit, according to Morningstar.

Yields, which had been declining since their 2023 peak, have “reversed course” in 2026, Morningstar revealed in its ‘European Asset Managers: 2026 Q3’ report.

Morningstar said that yield curve steepening and spread widening have triggered a sharp increase in European leveraged loan yields, which now stand at 7.2 per cent, up 62 basis points since the start of the year.

“Higher funding costs raise the bar for new buyout economics and make refinancing less attractive for existing portfolio companies,” the firm said.

The report’s authors, Johann Scholtz, senior equity analyst, European financials, and associate equity analysts Svetlana Menshchikova and Fabienne Pfeiffer, noted that leveraged loan spreads are “a real-time gauge of credit stress in the sub-investment-grade market that underpins most private credit portfolios”.

Spreads have widened 44 basis points year-to-date, to 494 basis points.

However, while this is still below “crisis levels”, Scholtz, Menshchikova and Pfeiffer warned that “the direction of travel is notable”.

“A maintained move higher would signal deteriorating borrower quality, a leading indicator for private credit markdowns and potential impairments,” they concluded.

Morningstar data also highlighted private market firms “no longer command the premiums they once did”, as private market fundraising remains depressed.

Despite their growth prospects and higher profit, private market firms have been trading close to traditional asset managers’ price-to-earnings ratios.

Meanwhile, traditional asset managers have benefitted from rebounding markets which helped to lift assets under management and drive a recovery in fund flows.

However, Morningstar concluded it is starting to see “more value” in private market managers than their traditional rivals.

It acknowledged that some of the negative news flow around private credit had contributed to the pressure private market managers had found themselves under.