With the second half of the year well underway, we look at distressed activity over the summer and highlight the ongoing market opportunity in the asset class.
Key points:
Increased distressed and stressed loan activity this summer.
The trend for increased Liability Management Exercises in Europe.
Recent court rulings around minority creditors.
The opportunity in the European mid-market space.
Distress heated up in the summer slowdown
The summer lull in European financial markets didn’t extend to distressed investing this year, and August saw a flurry of activity. In particular it was the loan space which saw the uptick in activity which is typically quieter than the bond market due to the private nature of the loans market. There was a sharp increase in the number of loans classified as stressed or distressed from 75 loans from 43 companies at the end of July to 97 loans from 49 companies at the end of August[1].
Names such as Inovie, Biscuit International, Kloeckner Pentaplast and Merlin Entertainments made headlines in the financial press, making it clear that economic & regulatory headwinds and the recent perfect storm of issues for corporates (including the Ukraine war, supply distruptions, tariff uncertainty and lacklustre European growth) are sector-wide.
A particularly interesting story is Merlin, which was downgraded to triple-C by S&P on 20 August. The theme park operator made the headlines for the ratings downgrade itself, but also because it now impacts triple-C baskets of all affected CLOs with S&P as a rating provider. S&P cited "persistent high cash burn" and an "unsustainable" capital structure as the reasons the downgrade.
Aggressive LMEs on the shores of Europe
Another recent area of interest has been court rulings around liability management exercises (LMEs). As detailed in our previous piece (link below), it has become apparent that it is no longer assumed that investors in companies that are restructuring (either operationally or financially or both) can sit on the sidelines and expect fair treatment.
The trend of aggressive LMEs first started in the US and it is now being seen on European shores, although current LME trends in the US show a shift from aggressive-style transactions toward more benign, whilst in Europe the opposite is true. ‘Violence’ associated with LMEs was considered to be less of a threat in Europe due to law generally providing more protection to minority creditors, more stringent restrictions on what a company’s directors may do, and risks to investor blacklisting.
LMEs have become increasingly prevalent as companies seek to manage their debt obligations without resorting to formal bankruptcy proceedings. In response to the proliferation of LMEs, creditors are actively seeking protective measures to safeguard their positions against future disadvantageous transactions. Protective measures can include cooperative agreements between lenders and the potential litigation threat from minority investors.
Recent court rulings in the UK have heavily leaned into fairness with respect to minority creditors, as seen in Waldorf and Petrofac, which is adding a level of complexity with respect to restructurings. Whilst complexities surrounding LMEs for larger capital structures will persist for the foreseeable, within the European mid-market we anticipate that conventional restructurings will continue to dominate due to simpler capital structures and the ability to influence restructuring proceedings. This can make achieving a consensual deal simpler in theory, which positions us uniquely to deliver meaningful results.
A mid-market focus: less competition
With continued macro uncertainties surrounding global politics, weak growth across many European sectors, cost pressures and tighter financial conditions, this is likely to lead to a continued uptick in opportunities as special situations investors. The size of this market opportunity and the fact that the European mid-market is less competitive has led to strong performance year-to-date.
For investors with the flexibility to pursue a special situations credit approach, the European mid-market presents an exciting opportunity, which we anticipate will be prolonged.
1 Top of the Flops — European Distressed Watchlist August 2025 (9fin).