Transactions that would previously have been financed entirely in the loan market are increasingly requiring bond market participation to be completed, with EA Sports and Sealed Air being prime recent examples: the loan market could not absorb the transaction alone, and bond market participation was what got the deal done. We do not believe that outcome is an isolated episode, but rather a signal of something structural. In fact, ~7% of the loan market matures within two years, which means >$100bn of par value in the loan market will need to consider if high yield is a better option. This is in addition to the ~10% of the high yield market that matures within the next two years, the highest share since the pre-GFC period.
While new transactions have increasingly leaned on the high yield market, we believe upcoming refinancings are likely to include high yield in a more significant way. Asurion offers an instructive example. As recently as last year, Asurion was a loan-only issuer with approximately $12 billion outstanding across half a dozen tranches. Facing a near-dated maturity profile spanning 2026 through 2028, and with many existing investors already at capacity on the name, the company needed a new approach. By pivoting to high yield, it reached a differentiated investor base and priced $3.3 billion of secured bonds to repay existing tranches earlier this year. The paydown restored confidence in the loan market, drove those remaining tranches tighter, and made subsequent refinancings cheaper. The virtuous cycle that followed was not accidental, but rather a direct consequence of opening a new financing channel. Looking ahead, we expect many software issuers, particularly those demonstrating strong cash generation and consistent profitability, to follow a similar path. The high yield market offers not just an alternative, but in some cases, the better route.
What does this mean for investors?
The case for high yield today is not a bet on spread compression, but rather a structural reallocation thesis with multiple return paths. For allocators building exposure across both markets, the U.S. and European opportunity sets also don’t move in lockstep — sector composition, issuer base, and rate-cycle timing differ enough that combining them adds a diversification benefit distinct from either market alone.
The first is the yield itself. With the ICE BoA High Yield index at roughly ~7.3% today, the asset class offers attractive absolute income at a moment when fixed-rate certainty is increasingly valuable. In Europe, ICE BoA European High Yield a current yield of ~5.5%, with FX hedged investors picking up an additional ~150 basis points of carry. A bond that locks in that coupon for five to eight years, with call protection, is a different proposition from a floating-rate loan that reprices every quarter in a volatile rate environment.
Notably, U.S. Morningstar LSTA leveraged loan index yields currently sit at 8.1%, ~100 basis points above the high yield bond index. For investors willing to move up in quality, that premium no longer reflects better fundamentals. It reflects software overhang, CLO technical pressure, and documentation concerns that have accumulated in the loan market. In other words, the loan market is offering more yield today precisely because it carries more risk. High yield, at current levels, may be the more compelling risk-adjusted entry point.
The second is the optionality embedded in the structure. When issuers refinance early, as they have done consistently in periods of improving credit access, investors who purchased at a discount capture returns well above the modeled yield to worst. When bonds are not called and remain outstanding above par, the coupon continues to compound, often delivering realized returns that exceed initial expectations. When M&A activity accelerates, bonds held at a discount get called at par, generating IRRs that spread tightening alone would never produce.
For allocators who have underweighted high yield or have not revisited the thesis in several years, the question is simple: does the portfolio reflect what this market has actually become, or what it used to be? Structural quality is improving, issuer demand is growing, and the absolute return relative per unit of risk taken is a compelling proposition. The first act was a decade in the making. The second is already underway.
