Deferred, Not Defused: Three Forces Reshaping Restructuring in 2026

For all the macroeconomic pressure of the past 18 months, 2026 has so far been a quieter period for European restructuring than many had expected. We’ve seen default rates plateau and no spike in headline large-cap insolvencies, while the volume of complex restructurings remains well below the levels that macro conditions have led many to expect. Some argue that the data indicates a softer cycle than was feared. But we believe the picture is a little more nuanced. 

There are three trends that are converging which we expect to define the remainder of 2026 and shape the restructuring cycle into 2027. This includes a delayed build-up of restructuring activity, the mainstreaming of US-style liability management exercises (LMEs) in Europe and an increasingly two-tier private credit market that’s defined by large funds dominating complex restructurings and smaller lenders under pressure. Together, these factors hint at a more active, contested and uneven restructuring landscape in the months and years to come.

Buying time, not solving problems

In the first half of 2026, many borrowers have found ways to manage near-term pressure without engaging creditors. Documentary flexibility, such as generous EBITDA add-backs, have kept financial covenants from triggering, while PIK toggles have allowed borrowers to defer cash interest and amend-and-extend transactions have pushed maturities out by another 12 to 24 months. 

However, these mechanisms have simply deferred the harder conversations rather than resolved the underlying issues and the market’s headline figures give a misleading impression of calm. US private credit defaults over the last 12 months are running at around 5.8% once selective defaults and loans on which interest is being deferred are considered. This is well above the 2-3% commonly quoted. 

A significant share of European leveraged loans and high-yield bonds also matures between 2026 and 2028. Deals struck in 2021-22 at peak valuations and high leverage are the most exposed. Software is a key pressure point, with around $80bn of debt maturing in 2026 alone, alongside European commercial real estate, which has some €2tn of debt maturing across 2024-2026.

There are parallels with the post-GFC cycle. After 2008, restructuring activity grew over several years as covenant cushions eroded and refinancing windows closed. There’s a similar lag now in motion. 2025’s wave of European amend-and-extends across chemicals, software, healthcare and retail, reflects a market that has, collectively, chosen to buy time. Market expectations are under-pricing the volume and complexity of restructuring activity to emerge from late 2026 onwards.

LMEs: from last resort to first move

As we look through to the remainder of 2026 and into 2027, we expect that a significant number of distressed situations will be tackled using tools that until recently sat at the edges of European practice. LMEs – techniques such as up-tiering, where some lenders are granted priority over others, and drop-downs, in which valuable assets are moved out of the lender group to provide collateral for new financing – have moved from a US speciality to an established part of the European toolkit.

European loan documentation has loosened materially over the past cycle, with cov-lite terms now the norm in European institutional issuance. Importantly, many European capital structures now include NY-law governed documentation, which, broadly speaking, is more permissive of certain LME techniques than English law. Meanwhile, US-trained advisers, who have grown up with the LME toolkit, are increasingly active on European matters. The combined effect has been to bring the LME toolkit into many contingency planning exercises.

The appeal of these LMEs for companies, sponsors and supporting creditors is the ability to restructure capital stacks outside court-supervised processes, often preserving equity value and reducing costs relative to a formal proceeding. It’s also precisely why these toolkits are now an opening reference point in stressed European situations – just three years ago, they were considered a last resort. 

Selecta's restructuring has drawn particular attention as one of Europe's more aggressive LMEs of 2025, and the disputes that followed have become a focal point for how creditor cooperation arrangements are tested. Hunkemöller's transaction has since been heavily scrutinised, with creditors challenging its implementation in both New York and London.

In turn, we are seeing a more adversarial market emerge. Litigation risk is rising, and a widening divide is opening between the larger in-the-money creditors who lead these transactions and the minority or junior creditors typically on the receiving end. European courts are hearing the first substantive challenges, with creditors drawing on local law doctrines such as abuse of rights, good faith and prohibition of immoral transactions in civil law jurisdictions and oppressive majority concepts in the UK.

The two-tier turn in private credit

The rise of European LMEs is closely linked to a parallel shift in the lender base. Power within the private credit market is unevenly distributed, with larger credit funds increasingly dominating complex large-cap restructurings, using their scale to drive aggressive strategies including LMEs and majority-control plays. The size of the private credit market overall, some $1.5-2 trillion, masks how concentrated firepower for distressed situations is. Around $100bn has been raised over the past two years for distressed and special-situations strategies, and the 10 largest funds currently in market are targeting another c.$50bn.

Smaller lenders, meanwhile, are under pressure to protect their positions. In creditor-on-creditor conflicts, minority holdings can be subordinated or wiped out before there is any formal restructuring process to respond to. Mid-market and newer funds could be particularly exposed, especially where they lack the scale needed to influence the outcome.

Visibility into this market remains limited and concerns are growing over hidden systemic risk. Private credit reports less data than public markets and underwriting standards are uneven, though regulators including the FSB and the US Office of Financial Research have begun to measure exposures more systematically. The rising use of PIK interest is another signal that cash flows are under stress, particularly in the mid-market.

Five priorities for a more contested cycle

For sponsors, borrowers and lenders, these trends translate into five priorities that stand out for the next 12 to 18 months.

• First, plan for when the levers run out. Borrowers and sponsors should model the point at which EBITDA adjustments, covenant headroom and liquidity stop carrying the business, and prepare a plan before that point arrives.
• Second, use the open window to refinance. Borrowers approaching 2027-2028 maturities should treat the second half of 2026 as an active opportunity, as capital is likely to become more selective as activity builds.
• Third, treat LMEs as a standard part of the conversation. Sponsors, borrowers and creditors should assume an LME is on the table in most stressed European situations, and pre-emptively map documentation capacity, intercreditor mechanics and the jurisdictional levers available across the group structure.
• Fourth, bring restructuring and disputes thinking together earlier. With European courts now hearing the first challenges to aggressive LMEs, parties on every side will benefit from building early legal arguments, an evidential record and litigation positioning in parallel with commercial negotiations.  
• Finally, for minority lenders, assess the position early. Once a priming or up-tier transaction is announced, the realistic options narrow quickly. Exit, intercreditor coordination, structural challenge and hedging options will be materially more valuable when assessed in advance.

The next 12 to 18 months will be defining for European restructurings. For sponsors, borrowers and lenders, the practical question is not whether activity will rise but how to be positioned when it does. Those who engage early in the market will be best placed to shape outcomes in 2027.

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