Junk Market Splits as European Spreads Hit Widest Since 2009
(Bloomberg) — Not since the global financial crisis of 2009 has the junk bond market been this divided in Europe.
With the region’s companies coming under strain — whether from AI, interest rates or energy costs — the weak are quickly getting weaker. As a result, the gap between the best- and worst-rated junk bonds in Europe has blown out in recent weeks and now stands at the widest in more than 17 years.
The selloffs at the distressed end of the market have been so severe that Chris Ellis of BNP Paribas Asset Management says it can feel like “panic stations” in some extreme cases because no investors are willing to step in to buy, so prices keep falling and falling.
A rout in Virgin Media bonds — among some of the most widely held by the region’s high-yield portfolio managers — is also rattling investors.
Dispersion, or a widening difference in performance by bond, company and sector, is playing out across credit markets, but is most pronounced in high yield. Investors are growing anxious about how weaker firms will cope with higher refinancing costs, with a wall of junk debt set to mature in coming years.
A difficult year for some of the biggest players in European high-yield debt, like Arini Capital Management and Sona Asset Management, is compounding the pain.
Investors say they’re avoiding highly-leveraged credits with connections to France, and are avoiding debt in the telecommunications, AI-related and real estate sectors. At the other end of the spectrum, money managers are hanging on to safer bonds, leaving few double B-rated bonds available to buy.
“Double B credits still appear tight, while the triple C market has reduced in size and much of it is trading distressed,” said Mark Remington, a portfolio manager at Efg Asset Management. “The recent weakness seems to be down to higher rates. Also, VMED sparked some nerves, especially in the telco space, and now people are looking at some of the larger debt stacks and saying these don’t work.”
Some lower rated borrowers in unpopular sectors have been forced to abandon deals entirely. German real estate firm Net Zero Properties pulled plans for a €500 million ($562 million) bond in September, while French network service provider Circet was recently forced to postpone a €3 billion-equivalent debt refinancing.
To get trickier refinancing deals done, banks and private equity sponsors have been offering sweeteners. Hg Capital-backed software firm Team.Blue, which pulled a deal earlier this year, came back to the market offering lenders pricing concessions and protections to get its debt extension done, while online payments platform Paysafe Ltd. proactively offered creditors a trio of safeguards.
Lender-Friendly Market
It’s a similar situation with buyout financing deals that are perceived to be riskier, either due to their sector, amount of leverage or other company-specific factors.
Banks working on the financing for Platinum Equity’s acquisition of a stake in Nestle SA’s troubled water business added a broad lender protection called an omniblocker and also boosted spreads on the deal to entice investors for example.
“We’re seeing a lender-friendly market,” said Andrew Lawson, head of capital markets and the CLO business at NorthWall Capital. “In an environment where it’s hard to get some deals over the line and banks are having go/no-go calls daily, lenders are having much more of a say over documentation changes and terms.”
To be sure, deals linked to well-liked credits, like product testing and inspection firm Intertek Group Plc, are still being well received. EQT AB’s almost £5 billion-equivalent ($6.6 billion) debt package financing the acquisition of Intertek got through the market at a much tighter spread than Nestle Water, as investors saw it as a safer, infrastructure-like asset.
AI Dispersion
It’s not just European junk investors who are getting picky. The spread between CCC-rated and double-B rated corporate bonds in the US has more than doubled since the start of the year, reaching the widest since 2020.
Read: ‘Total Meltdown’ in Riskiest Debt Unnerves Market: Credit Weekly
And even in the investment grade market, the AI-related bond rout has driven up borrowing costs for hyperscalers as investors become wary about the sheer amount of debt being raised and nervous about returns on spending. But there’s growing differentiation among issuers, with investors demanding bigger yields from highly-leveraged companies like Oracle Corp.
Read: Wall Street’s AI Debt Machine Is Starting to Choke on Supply
“Dispersion across AI issuers, each measured against IG bonds of similar maturity, has risen to 65 basis points from 24 basis points just a year ago,” Barclays analysts led by Dominique Toublan wrote in a recent note. “That is the highest level in recent history.”
Outside of AI, investors are also having to work harder to figure out where to put their money.
For BlackRock Inc., current conditions call for greater selectivity across regions, sectors and ratings, and even within individual issuers’ capital structures.
In some industries, like chemicals and automakers, that may mean dividing borrowers into the haves and have-nots dependent on individual business strategies.
“There is definitely a much wider gap between more solid issuers and much weaker issuers from a fundamental credit perspective,” said Nachu Chockalingam, senior credit portfolio manager at Federated Hermes Ltd. “Dispersion has to become more of a priority and more of a focus.”
–With assistance from Tasos Vossos.
©2026 Bloomberg L.P.
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