Banking & Finance 2026

Overview: Investor Demand Drives an Active Market

To date in 2026, global leveraged finance activity has been characterised by resilient headline volumes as market participants continue to monitor geopolitical tensions, evolving trade policies and increasing uncertainty around the pace of artificial intelligence-driven disruption to certain sectors. The first half of 2026 saw sustained high volumes of refinancings and repricings, alongside a further increase in M&A-related loan activity compared to 2025. The slower-than-expected reduction in interest rates in 2026 is expected to keep overall funding costs elevated, in particular for lower-rated borrowers.

So far in 2026, the broadly syndicated market has been the financing choice for the majority of large-cap buyout financings (rather than from direct lenders), while private credit providers have been the financing choice for fewer but larger and more bespoke transactions. As a result, borrowers have sought to capitalise on the competitive tension between the syndicated and private capital markets by opting to run some transactions on a dual-track basis with both syndicated and private credit options.

There remains a valuation gap in the M&A market between the prices at which sellers are willing to part with their assets (often purchased at high multiples) and the price at which purchasers are willing to buy. The scarce exit opportunities for private equity sponsors are apparent in statistics showing that the average hold time for portfolio companies has steadily increased since 2019. In response, private equity sponsors have increasingly turned to alternative strategies (such as sales of minority stakes and dividend recapitalisations) to generate returns for LPs.

The market outlook remains cautious, with refinancing and liability management activity expected to remain high in light of upcoming debt maturities, alongside signs from private equity sponsors of prioritising exits and add-on acquisitions over deploying accumulated dry powder into new platform investments

Trends in an Uncertain Market

The first half of 2026 saw a further rise in US M&A-related loan issuance (including both LBO and non-LBO transactions), reaching USD144.8 billion, up 31% from the comparable period of 2025. LBO loan issuance alone was USD55.1 billion, a 22% increase year-on-year, while non-LBO M&A loans totalled USD89.7 billion, up 38%. Refinancing activity in the US markets remained the largest use of proceeds, at USD165.3 billion, down 8% from the first half of 2025, as the market continued to prioritise maturity extension and spread-reduction amendments. Dividend recapitalisation loan issuance also moderated, totalling USD28.4 billion, a 24% decrease from the same period in 2025. Notably, the increase in M&A-related volume was partly driven by a small number of large corporate transactions, including Warner Bros. Discovery’s USD13 billion term loan B, the largest institutional loan since the global financial crisis, which alone accounted for roughly 18% of second-quarter net issuance.

In terms of new issuance in the US markets, just 28% of first-half 2026 primary market activity was unrelated to a refinancing, maturity extension or repricing amendment, which is consistent with 2025, but well below the 50%-plus levels typical before the 2022 rate-hiking cycle began. Sponsor-driven M&A and LBO volume slowed sharply in the second quarter, with US private equity deal activity down 38% quarter-on-quarter amid geopolitical uncertainty and macro headwinds, while corporate borrowers stepped in to drive new supply, led by Warner Bros. Discovery’s USD13 billion term loan B, the largest institutional loan since the global financial crisis.

In the European market, refinancing remained the largest use of proceeds in H1 2026, totalling EUR28.4 billion, as year-to-date institutional loan activity of EUR168 billion ran well ahead of EUR150 billion in H1 2025. Overall M&A-related loan issuance eased to EUR20.0 billion in H1 2026, down from EUR24.6 billion in H1 2025, with buyout-specific volume of EUR13.3 billion.

In 2026, the competitive interplay between the broadly syndicated loan (BSL) and private credit markets continues to shape pricing, covenant structures, and deal flow, with the ongoing supply/demand imbalance in both markets keeping significant downward pressure on interest rate margins. Borrowers, especially those with good credit, have obtained favourable pricing and looser covenant terms across both markets, and cov-lite structures remain the norm in the BSL market, featured in roughly 90% of new US deals.

Direct lending clubs remain an important component of the financing landscape, enabling private credit providers to pool resources and underwrite multi-billion-dollar transactions. As competition between private credit and syndicated lenders persists, these club deals continue to offer sponsors certainty of execution, speed, and flexibility in structuring, including features such as delayed-draw term loans and, to a lesser extent, payment-in-kind options, making them a compelling alternative for large-scale financings that historically would have been the domain of the BSL market.

In the USA, direct lending’s momentum in large-cap buyouts slowed in 2026, as the broadly syndicated market took the majority of LBO financing volume for the first time in several years. Estimated direct lending LBO loan volume fell to USD32.1 billion in the first half of 2026, down 16% year-on-year, with deal count down 15% to 94, and no direct-lending LBO financing above USD2 billion tracked since early March 2026. This pullback has been compounded by a wave of redemption requests across semi-liquid direct lending vehicles, with investors seeking to withdraw roughly USD15.6 billion in the second quarter alone, constraining managers’ capacity to underwrite new large-cap commitments.

In Europe, the majority of large-cap LBOs by number, if not by debt volume, continue to be funded by the BSL market. With pressure from the broadly syndicated market, private credit providers have explored alternative options to generate returns, including holdco PIK financings. Whilst capital raising for direct lending strategies has fallen to around 40% of private credit capital raised, down from more than 60% in each of 2024 and 2025, direct lending continues to be the favoured option in the European middle market, as well as competing with the BSL market on large-cap LBOs.

In the USA, the second-lien market, which had shown renewed momentum in 2024 and 2025, retreated sharply in 2026 as issuance was limited to a single USD200 million transaction in the second quarter, following no second-lien issuance at all in the first quarter. This contraction reflects sponsors’ and lenders’ continued preference for unitranche structures, which avoid the intercreditor complexity and potential for conflict inherent in second-lien arrangements.

Syndicated delayed draw term loans (DDTLs) remain an increasingly prominent feature of US deals and are especially attractive and appealing to sponsors pursuing buy-and-build strategies. While DDTLs have long been a staple of private credit, their adoption in the syndicated market has accelerated, reflecting both competitive pressure from private credit and sponsors’ desire for flexibility. DDTLs remain less common in European BSL deals, where they have stayed the “sweet spot” for private credit. It is not uncommon for a privately placed DDTL to sit alongside a TLB.

Dividend recapitalisation activity moderated in 2026 relative to 2025, though debt-funded dividends continued to serve as a relief valve for sponsors globally, with USD44 billion funded through the loan and high-yield bond markets in H1 2026. In Europe, dividend volumes grew during the second quarter to EUR3.9 billion from EUR2.4 billion in the first, though the EUR6.3 billion raised across H1 2026 remains behind the EUR9.6 billion recorded in the same period of 2025. Portability features are increasingly making their way into credit documentation as sponsors seek alternative exit strategies.

As riskier borrowers returned to the market in recent years, the average leverage ratio for non-investment grade borrowers stood at 4.81x in the first half of 2026, down from 5.02x in 2025, remaining below the 2021 peak of 5.90x, reflecting a still-cautious approach by US lenders compared to the pre-pandemic era. Despite some tightening in credit spreads, persistently high benchmark rates kept interest costs elevated, with the average interest coverage ratio at issuance holding around 3.0x. Market participants report a broader reset taking shape, with spreads widening, leverage pulling back and deal terms improving as lenders reassert pricing power amid the slowdown in sponsor deal making. In Europe, first-lien debt is on average leveraged at 4.71x, but transactions with leverage of 6x or higher represented the lowest percentage of deals since 2016 (LCD).

Liability management transactions (LMT) continue to be a point of focus in the leveraged finance market. In the USA, the pace of LMTs, including uptiering, drop-downs, and double-dip structures, has remained a persistent feature of the market, driven by ongoing refinancing challenges, constrained exit opportunities for sponsors, and the need for flexibility in managing capital structures. In Europe, examples of LMTs remain rarer than in the USA, and the ability to execute such transactions out of court varies by jurisdiction, although there has been a noticeable uptick in sponsors exploring options and executing such transactions.

Lenders continue to push for protections against LMTs given the general loosening of covenant packages, increasingly entering into co-operation agreements to limit the risk of such transactions, while borrowers have sought to preserve flexibility through anti-cooperation language, which lenders have strongly resisted. In February 2026, Xerox completed a USD450 million “non-subsidiary drop-down”, contributing its trade marks and other IP to a newly formed joint venture in which it holds no majority voting control, sidestepping J. Crew- and Pluralsight-style blockers that govern transfers only to unrestricted or non-guarantor restricted subsidiaries.

While sustainability-linked leveraged loans have gained traction in the US market since 2024, with certain facilities tying interest margins to compliance with agreed key performance indicators verified by independent third parties, their adoption in the leveraged finance market remains selective. In Europe, where ESG-linked margin ratchets have a longer history, the issuance of qualifying sustainability-linked loans and green loans continued to grow, though many European facilities featuring margin ratchets would not meet the LMA’s sustainability-linked loan criteria. Advisory bodies such as the LMA and LSTA continue to refine standard provisions and guidelines in this area.

A key 2026 development in EU banking regulation is Article 21c of CRD VI (Directive (EU) 2024/1619), which bars third-country credit institutions from providing core banking services (ie, deposit-taking, lending, and guarantees) into the EU without an authorised local branch or EU-passported entity, subject to narrow exemptions. The rule takes full effect on 11 January 2027, with a grandfathering cutoff of 11 July 2026; commitments and credit agreements entered into prior to that date are expected to remain protected until a material amendment is made. For US banks, the impact is significant, reaching routine wholesale cross-border activity in Europe, including syndicated facilities, corporate lending, fund finance, and guarantees. This regulation is prompting institutions to reassess EU client relationships, evaluate reliance on exemptions like reverse solicitation, and consider establishing EU branches or authorised subsidiaries to preserve market access. US banks have not converged on a collective approach amid the absence of clear regulatory guidance, though the LSTA has issued a Market Advisory on CRD VI (10 July 2026), providing initial guidance for loan market participants.

Conclusion

Over the past year, the leveraged loan market has continued to expand, with global leveraged loan and high-yield bond issuance on pace for its strongest year since 2021, driven by robust refinancing activity and improving high-yield conditions. Despite this backdrop, new-money issuance for M&A and LBO financings remains constrained relative to pre-2022 levels as sponsor deal making slowed sharply in the second quarter of 2026 amid geopolitical uncertainty, elevated borrowing costs and growing caution around AI disruption risk. The resulting bifurcation between higher-quality, larger borrowers, who continue to access favourable pricing, and lower-rated or sector-exposed credits, is expected to persist. Looking ahead, market participants expect a modest recovery in private equity deal making in the second half of 2026, although sponsors are likely to prioritise exits and add-on acquisitions over new platform investments, meaning refinancing and liability management activity will remain the dominant themes as companies continue to manage upcoming maturities and optimise capital structures in a competitive, evolving market landscape.