European bond market: dealing with defaults
European sub-investment grade bond defaults are expected to remain above long-term averages through the course of 2025. Issuers and investors will look to an experienced bond trustee to partner with them as they steer through default difficulties with as little disruption as possible.
A cycle of rising interest rates and macro-economic and geopolitical uncertainty have taken a toll on European bond markets. Elevated borrowing costs, combined with market volatility affecting company earnings, have driven up default rates in Europe’s high-yield bond markets.
A wave of defaults by large issuers early in the year pushed the European trailing 12-month high-yield default rate to 4% in February 2025, according to Fitch Ratings. This was up from 2.9% in January and the highest level since March 2012.[1]
At the end of 2024, there was optimism that European high-yield bond defaults would decline year-on-year by the end of 2025, albeit remain above long-term averages. [2] This expectation was based on a series of central bank interest rate cuts across the region in 2024, which were anticipated to bring stability to fixed income markets and borrowing costs.
However, the rising risk of defaults among large, high-profile issuers is a growing concern,[3] particularly within certain sectors that are more vulnerable to such inflationary and cost pressures. Coupled with fears over how a tariff war could impact global trade and corporate earnings, default rates may climb as high as 5% by year-end, according to JP Morgan estimates.[4]
“Expectations in previous years that defaults would increase never materialised, but during the last 12 months there have been large, high-profile defaults and we have also noted an increase in reservation of rights letters and covenant breaches, which could signal the potential for increases in default volumes through the year,” says Anatoly Sorin, Head of UK at Nordic Trustee.
Refinancing risk
Market participants are also keeping a close eye on a looming maturity cliff.
European high-yield bonds worth €225 billion will mature in the next three years, according to law firm White & Case. This sector holds twice as much debt requiring refinancing than the larger leveraged loan market.[5]
Despite European high-yield bond markets seeing a near-tripling of debt issuance for refinancing in 2024, the market will have to sustain significantly higher levels of refinancing during the next 36 months to meet demand.[6] Should refinancing issuance fall short of the levels required, a further uptick in default rates could follow.
“Lending activity has slowed markedly as stakeholders assess the impact of tariff uncertainty, and that has direct implications for managing upcoming maturities as issuers rely on refinancing to push out maturities,” Sorin says. “There is liquidity in the system, but there seems to be an uncertainty around refinancing as markets pause.”
Preparing to manage defaults
As the risk of rising default rates intensifies, issuers, investors and bond trustees will be readying to manage the fallout from any defaults as swiftly and efficiently as possible.
A default on a bond can occur when an issuer fails to make interest or principal payments on schedule. Bondholders then have the right to demand full repayment of all outstanding interest and principal immediately. If the bonds are secured, bondholders may also enforce their security rights over pledged assets.
However, demanding immediate repayment of all outstanding payments or enforcing security straight away can push an issuer into insolvency. This can make it more difficult for bondholders to recover outstanding amounts owed to them.
Instead, bondholders have the option of negotiating a debt restructuring or maturity extension, granting waivers, restructuring the debt or in some cases taking control of the issuer.
“Default and bankruptcy are last resorts, and issuers and noteholders will be working hard to find ways to refinance or restructure. There are different solutions out there now. Amend-and-extend deals or securing capital from private credit providers are among the options available to borrowers, in addition to other out of court and formal court sanctioned restructuring processes available,” Sorin says. “The market has navigated shocks to the system before, such as the pandemic, and will continue to be able to do so utilising the various restructuring tools at hand, where needed.
Bond trustees: the key intermediaries
Whatever recovery pathway bondholders choose, the bond trustee plays a crucial role in delivering an optimal conclusion. Issuers usually have an administrative grace period if payment is late, but after this grace period, there is a declaration of non-payment and default.
In the event of a default, the bond trustee will be responsible for various key functions, including notifying noteholders of a missed payment, declaring a default, and enforcing rights against secured assets at the bondholders’ direction, managing creditor meetings, presenting resolutions and when required, running creditor voting.
The role of the bond trustee, is to represent the interests of all noteholders, ensure that all messages and communication between noteholders and issuers are directed through clearing systems expeditiously to enable noteholders to be represented in determining the steps to be taken and the implementation of decisions following a default, and understanding and adhering to any deadlines arising in court sanctioned restructuring processes.
“All parties will almost always hope to reach some kind of consensual agreement. In our role as bond trustee, we must be engaged and ready to act when asked. As soon as negotiations are complete and decisions are made by issuers and noteholders, we must be ready to move and facilitate very quickly, and in accordance with the required timeframe of the particular restructuring,” Sorin says. “Every restructuring is bespoke, and having an experienced bond trustee that is capable of anticipating the process of the chosen restructuring method and requirements of noteholders is crucial.”
An innovative tool that is often found in restructurings is the holding period trustee role, which can be used to hold restructured entitlements for noteholders who do not come forward during the restructuring consent process. It can also be applied to hold entitlements for noteholders who are legally prohibited or otherwise restricted from participating in restructuring votes. Their holdings are segregated into a separate trust arrangement while maintaining their legal connection to the underlying debt instrument. The rest of the bond can then be restructured or refinanced, with the segregated notes held in trust until a resolution is reached in respect of those segregated notes.
The value of independence
The value of having an independent bond trustee in place in a default scenario is not to be underestimated.
It is not uncommon for a bank arranging and holding a portion of a bond to also serve as bond trustee. In the event of a default, however, independence becomes critical to avoid bias or reputational risk.
“Banks acting as bond trustees will often resign in the event of default so that an independent bond trustee can be appointed to navigate the complexities of implementing a formal restructuring process,” Sorin says. “A large, complex institution would rather resign as bond trustee than trigger wider conflicts or risk for the organisation.”
Experienced, independent trustees also provide stability in volatile markets when issuers may apply pressure to waive certain provisions of a bond agreement on behalf of noteholders.
“Transaction documents allow bond trustees to grant certain waivers in particular circumstances. A bond trustee will want to be pragmatic but must have a robust legal understanding of its actual powers and position, and what its obligations to noteholders are,” Sorin adds. “The bond trustee does not want to be overreaching when asked by issuers to grant a waiver.”
With default rates expected to rise further, appointing an experienced, independent bond trustee with expertise in the default and restructuring process will help issuers and bondholders to protect value and find solutions as swiftly as possible.
[1] https://www.fitchratings.com/research/corporate-finance/bond-defaults-escalate-loan-defaults-stable-31-03-2025. See par 1
[3] https://www.ft.com/content/84be7389-cca7-4865-9f28-ee54edfbd28d. See par 3
[4] https://www.ft.com/content/84be7389-cca7-4865-9f28-ee54edfbd28d. See par 2
[5] https://debtexplorer.whitecase.com/leveraged-finance-commentary/high-yield-market-bounces-back-but-maturity-wall-looms. See par 13
[6] https://debtexplorer.whitecase.com/leveraged-finance-commentary/high-yield-market-bounces-back-but-maturity-wall-looms. See pars 7 and 13
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