The leveraged finance markets in the US and EMEA are expected to recover strongly in 2026, according to Moody’s Analytics. This outlook is driven by an increase in mergers and acquisitions (M&A), leveraged buyout (LBO) activity, and refinancing. Borrowers are anticipated to seek flexible financing options, leading to increased competition between broadly syndicated loan (BSL) lenders and private credit providers. Private equity firms are likely to deploy significant available capital, especially in sectors such as technology and healthcare.
Moody’s notes that large transactions will often use hybrid financing structures, while demand for collateralized loan obligations (CLOs) will continue to support opportunistic refinancing efforts. However, several risks remain present, including shifts in tariffs, inflationary pressures, geopolitical uncertainty, hidden leverage through off-balance sheet structures and net asset value (NAV) lending, as well as weak documentation standards. The rise of artificial intelligence-related credit concerns also contributes to a fragile investor sentiment despite improving issuance momentum.
“Borrowers are increasingly shopping between BSL and private credit markets, leveraging competitive pricing and flexible terms. Prospective rate cuts could accelerate BSL takeouts of private credit, while refinancings remain strong, supported by CLO demand and opportunistic issuance. Expect heightened risk as hidden leverage becomes more prevalent through off-balance sheet structures and NAV lending,” Moody’s stated.
Private equity sponsors face pressure to invest their record levels of dry powder as investment periods mature and valuation gaps narrow. Lower financing costs may lead to more deal flow in noncyclical industries such as technology and business services. Even if traditional LBO volumes stay subdued, other activities like sponsor-to-sponsor transactions or dividend recapitalizations are expected to sustain overall market activity.
“Despite constructive credit conditions, global trade policy uncertainty, inflationary pressures, and geopolitical tensions could disrupt base-case projections. Low-rated issuers remain most vulnerable to refinancing challenges and sector-specific shocks,” Moody’s said.
For CLOs specifically, declining interest rates are projected to improve performance across both the US and EMEA regions next year. Default rates for speculative-grade loans are forecasted to fall sharply: from 5.3% down to 3% in the US by October 2026; Europe is expected to see defaults drop from 3.8% down to 2.4%. Lower funding costs along with active refinancing should support this trend alongside increased LBO activity potentially driving new CLO issuance.
However, competition for high-quality assets between private credit funds and syndicated lenders may intensify structural risks such as weaker covenants or payment-in-kind features within these vehicles. Tight spreads coupled with limited rating changes could restrict managers’ ability to adjust collateral quality within portfolios.
Moody’s further elaborated: “US CLO collateral defaults will decline in 2026 as lower interest rates and extended maturities improve borrower liquidity. Fed rate cuts will reduce funding costs, supporting leveraged issuers and middle-market borrowers, though these remain more vulnerable than broadly syndicated loans. Competition with private credit will weaken covenants and add leverage risks but CLO structures will help absorb defaults.”
On the European side: “Strong liquidity and investor demand will keep defaults low and issuance high… Syndicated and direct lenders will offer ample refinancing options but at the cost of looser terms… Robust refinancing… though tight spreads will limit managers’ flexibility.”
To assist professionals navigating these trends Moody’s highlights its Research Assistant platform—a generative AI tool designed for faster access to data across geographies—enabling analysis on growth resilience or policy divergence among other topics.
Moody’s provides sample prompts that can be used with its Research Assistant platform:
– “What are the implications of rising hidden leverage through PIK debt and NAV lending on credit risk for US leveraged finance issuers in 2026?”
– “Provide a comprehensive analysis of how the bankruptcies of Tricolor and First Brands illustrate vulnerabilities in hybrid financing structures.”
– “How does the forecasted decline in speculative-grade defaults interact with rising covenant-lite issuance for overall credit quality?”
– “Summarize Moody’s outlook for refinancing activity in the US and EMEA including drivers behind the ‘pull-forward’ effect from 2028–2029 maturities.”
– “Under a scenario of persistent tariff escalation through 2026 analyze how CLO tranche upgrade/downgrade patterns could diverge from Moody’s baseline forecast…”
“As the global economic environment becomes more fragmented and complex timely analysis and forward-looking perspectives are essential,” Moody’s said.“Moody’s remains committed to providing the insight and tools you need to navigate uncertainty and seize new opportunities in 2026 and beyond.”
For additional research or forecasts related to these topics readers can explore further via Moody’s Outlooks hub.
