Alcentra’s Daire Wheeler on why loans are well placed amid volatility

Daire Wheeler, head of European liquid credit, Alcentra: Let’s take a step back. The main driver of volatility was people digesting what tariff headlines mean from a macro point of view. That’s evolved in a couple of different ways. The initial reaction was obviously negative, because a blanket tariff from the US on pretty much all its imports created concern around the US GDP outlook, and the global economy clearly isn’t immune from that. But at the same time, we did feel that Europe was in a better place given the direct tariff impact is less and Europe should be able to weather it relatively well — especially as we had seen more fiscal support, with the German infrastructure plan as well as increased defence spending.

There was some softness initially, but there followed something of a normalisation. We’re not back to where we started, but the US has softened its stance, [giving] the market confidence that the most negative outcome of no negotiations would not play out.

Also, the technical picture for European loans has been quite supportive. There’s been supply, but not a huge amount, alongside strong demand from CLOs that have already printed and more deals to price. CLO primary didn’t close as long as some of us feared.

Still, we’re not fully out of the woods in terms of headline risk. Take the UK-US trade deal: it still creates a higher baseline for tariffs than before this all started. Overall, we’re likely to end up in a better place than initially feared, but with still greater friction on US trade than before. Without a continued scale back in the tariffs there is a risk the macro is going to bite at the company level in terms of delayed investments; however Europe is in a better place to weather this versus the US given much better policy certainty. European GDP forecasts are broadly where they were before the tariff headlines, while US expectations have come down — though still higher than Europe, and not into a recession.

All of it is manageable for leveraged credit, so I’m cautiously optimistic, though there’ll be headlines from policy as it evolves.

Last year we still had €40bn-€50bn of M&A volumes, and the first quarter of 2025 alone had €10bn. On top of that, in Europe we are seeing a trend of some deals being refinanced from the private credit market into the syndicated market. Those deals leaving our market to private credit tend to be CCC assets. That was a trend up to March and continues today. Maybe a couple of deals avoided the syndicated route at the peak of the volatility, but that stopped pretty quickly.

While I don’t expect a big normalisation in M&A volumes anytime soon, there will be a gradual increase as PE firms have capital to put to work. Rates are lower in Europe, making for a better environment for M&A than the US. If this volatility had lasted longer, there would have been a risk of M&A falling away, but I think we’ll continue on a broadly similar path as before. Loan spreads are wider, but not at a level where M&A deals don’t work.

I think the gradual normalisation is enough for the market. Including M&A, private credit refinancings, and bolt-on acquisition type deals, the loan market is still growing.

Initially we’ll see managers with ramped warehouses drive deal activity. Then, although liabilities have widened, assets have widened too, so today [May 14] I think the arbitrage absolutely does work.

However, we need to see where those liabilities evolve, as the structured credit market is a little slower to react in both directions than liquid loan markets. Given we’ve seen a bit more stability in global markets, my take right now is that liabilities will come in to reflect that and printing will still work — all on the assumption that there continues to be a normalisation of trade policy. There’s always a risk of a headline that causes further volatility.

Perhaps certain resets are less likely to work, but my expectation is that we will get to a place where they do, and we will progress to a more normal market again.

It concerned the market for a couple of days, but in reality people use a number of different structures for risk retention, and the majority are compliant anyway. Global managers have different types of risk retention, horizontal or vertical, and it feels like less of a concern than when the headline first emerged. Most managers will have a solution that works or are already able to do it anyway.

Ideally, we look to print three deals in a year, so two more this year, but with a heavy caveat that they’re subject to market conditions. You can plan, but some considerations are out of our control, and it will always depend on how arbitrage, sourcing assets, and cost of liabilities all play out.

We priced a large €579m deal in February that was well timed as we then took advantage of volatility to buy assets after it printed. We also priced a reset in early April at a more difficult time for the market but with a good outcome. Positively, we’re not sitting on warehouses with lots of assets, which would risk creating volatility that forces us to print quickly. We have two warehouses open and ramping, but they are low ramped, and we have a third warehouse with no assets. We have optionality.

Resets will be by situation. Some of our deals have fairly wide liabilities and are coming out of non-call, meaning a reset potentially makes sense even at current levels. On end-of-life deals, right now, none are at a level where amortisation makes it immediately obvious we should call or reset. Some will be termed out a little bit, but there are some we could reset too. The volatility has not caused a huge amount of change — maybe a little bit of a terming out or delaying some resets. But we will still look to be active in new issues.

We had already moved more defensively in February and early March. Our thesis at that time was that there was less of a premium for cyclical credits versus defensive credits, and in our experience, it doesn’t make sense to take that beta risk when you’re not getting paid as much. This meant we had already raised our cash balances and gone more defensive generally coming into April.

Today I am still constructive on the European macroeconomic outlook. Consensus is for around 0.8% GDP growth for Europe, and in that environment, I think loans continue to perform well. The rolling 12-month default rate for European loans remains below 0.5%, and rates have come down, which helps.

Equally, there are still headline risks, and for us it still makes sense to focus on more defensive sectors such as healthcare, TMT, services and IT. Those sectors perform well and are more European focused; we are a little more cautious on credits with more US exposure — partly because of the tendency for LMEs [liability management exercises] in the US.

There’s sector overlay, geographic overlay, and also individual credit overlay, and we’ve been very active in trading across our platform and exiting credits that we think rallied too much. It’s a continuation of what we did pre tariffs. I don’t think growth is high enough to warrant leaning into lots of cyclical or junior risk.

How it plays out in Europe versus the US is interesting. It is a lot harder to do in the European market, firstly because restructuring regimes make it more difficult to write down some lenders and not others, or give different recoveries, but also because directors’ duties in Europe tend to limit the ability for dividends in companies in more troubled situations. In the US you can extract good value if you’re in the tent, but it can be negative if you’re not involved. It’s often a little bit sponsor-driven in the US, whereas in Europe — if anything — we’ve seen sponsors putting equity into businesses, which creates a more positive dynamic.

In France, the SFR outcome was quite positive as senior secured lenders ended up a lot better off than people had originally expected. Some of those mechanisms played in our favour. We’ve had a lower default rate in European loans than US loans for quite a while and that’s something we expect to continue, which benefits European CLOs in terms of OC tests and par build. It’s definitely a question we spend a lot of time answering.