Years of lockdowns, rise in interest rates, return of inflation, outbreak of war, and a prolonged energy price spike all put real dents in European corporate balance sheets. This has been exemplified by European corporate capex spend growing at a mere 0.5% per year over 2020 to 2025 – well below the prior long-term average of 3.1%¹. This, coupled with inflation over the same period being c.4%², has led to sustained capex debt that needs to be addressed in future years. Overall consumer sentiment has also been muted since 2020, creating a double whammy in the European economy, showing readings substantially below the long-term average³.

These idiosyncratic events, which stand-alone were off the normal distribution curve, together formed an extraordinary and abnormal period. Adding to this, 2025 has also been filled with extraordinary political moves, such as tariff wars, further adding to this turbulence.

While the political landscape remains tumultuous, most of the issues listed above and the impacts are now well behind us or, when it comes to wars, hopefully coming to an end soon. While we can’t know, and should be careful to predict, we expect this period of extraordinary events to now be behind us – with a slightly more stable outlook ahead.

At Njord Partners, we certainly experienced our fair share of shocks during this time, especially given we entered the initial part of lockdowns with a 2019 vintage fund and having invested in (inter alia) aviation, both an airport and services/leasing, through the autumn of 2019 – just months away from the unprecedented scenario of lockdowns. We take pride in having an all-weather strategy with a very seasoned team of investment and operations professionals, excelling when things get complicated – this has certainly been tested in recent years. On top of the above hitting the portfolio, we and a handful of other funds had to deal with an unfortunate fraud case which led to us specifically being targeted by a very sophisticated (false) smear campaign. None of this has stopped us and the team has worked tirelessly with our holdings and our new investments, and the portfolio has been performing overall well as a result with aggregate EBITDA CAGR of 19.4% 2019-2025 vs the broader European STOXX 600 EBITDA CAGR of 13.8% over the same period.

As we enter 2026, not only is the legacy portfolio in good shape, but we have also done some very interesting investments over the last couple of years which are already bearing fruit. Follow the turbulence of the last years, the team is both battle-tested and trimmed for the upcoming next chapter of European mid-market special situations.

Our returns since inception⁴ stand at a Gross IRR of 16% and MOIC of 1.8x which is slightly shy of our targets but has significant upside to it given that there is further positive momentum in the portfolio which we expect to materialise in the foreseeable future.

When looking at the state of corporate Europe, it is true that Western European corporates have experienced the same issues we’ve seen in our legacy portfolio. However, the potential difficulty that looms on the horizon is that of a mounting credit issue that needs to be dealt with in the near term and therefore in our immediate investment horizon.

Over the last few years corporate defaults have been very muted. One can barely notice any stress in the system simply by looking at the historical go-to indicator for distress, default rates. Part of this is due to weaker loan documentation where covenants and security packages are watered down dramatically relative to historical cycles, with over 90% of European leveraged loans issuance being cov-lite since 2020⁵. The aspect is that lender and sponsor interests have, at times, bizarrely aligned in ways which might not always be in the best interest of borrowers.

The credit market has evolved since the GFC and direct lenders have taken up the large portion of the leveraged credit market that was previously dominated by banks, now making up over 40% of European outstanding credit, significantly up from c.15% in 2008⁶. This is on top of the fact that the overall European credit market has seen extraordinary growth since GFC and is today over five times as large as it was in 2008, currently standing at EUR 1,295bn of outstanding debt, up from EUR 250bn in 2008⁷.

Incentive models have also evolved to a situation where direct lenders seem to be at times, short-term economically incentivised through their fee-structure and their need to rely on sponsor deal-flow to keep overleveraged companies away from restructurings and subsequently right-sizing their loans. Their preference has instead been “kicking the can” down the road through amend & extend transactions. These allow lenders to keep unrealistic, and inflated, marks on their books, collect a few more years of fees and allow sponsors to keep the option (and potentially valuation-marks) alive.

Everyone is “happy” for the moment, apart from the overleveraged portfolio company which would have preferred a clean-up of its balance sheet and a fresh cash injection. Instead, they risk becoming zombie companies – which either don’t bounce back fast enough or worse, deteriorate until there is a cash squeeze / payment default. In these scenarios, the overall damage to the company is higher than it would have been through an earlier restructuring where not only the sponsor is completely out of money, but lenders will have to take a much larger write-down than if they would’ve done the rational thing when the problem first arose. In addition, new money might be needed which further dilutes the lenders position one way or the other.

The explosion in amend and extend transactions over the last three years (>10x compared to longer term trend in Europe⁸) is worrying as it points to a real problem and sickness in the market. A massive increase in temporary measures is certainly not part of a long term, real solution. It just pushes the problem into the future and as mentioned, might well mean the problem is exacerbated a few years later.

While we disagree with some of the more alarmist headlines in financial press of potential “systemic risk” etc⁹, we do see the massive maturity profile which has stepped up quite dramatically over the coming years. 26% of the total European Leveraged Loan market is maturing in 2028 alone, the largest ever 3-year forward percentage (average since 2007 of 11%)¹⁰. This clearly needs to be dealt with. The lion’s share of this will be refinanced orderly or resolved through M&A, some of it will continue to be amended and extended but we believe an increasingly larger part will have to be dealt with through proper restructurings where ownership will have to transfer away from sponsors to lenders (or incoming new finance parties). This will lead to further losses, write-downs and overall pain in the system from where we stand today.

While default rates are low and don’t indicate elevated stress in the system, several other factors do, including the large increase in amend and extend transactions per above. Further examples of this include (i) the fast-rising bankruptcy rates across several European jurisdictions over the last few years¹¹; (ii) the fact that some of the largest restructurings ever seen in Europe initiated in 2024/2025 (Altice France, Groupe Casino, Orpea, Atos & Thames Water inter alia) and; (iii) that there are a record number of leveraged loan names trading at 30 percent discount or more to par¹², currently 3.0% of outstanding issuance, compared to the prior 3-year average of 1.8% (2022-24) and the five years prior average of 0.8% (2015-21). In addition, the steadily increasing non-pro rata LME and creditor on creditor violence trends we are seeing in Europe recently add to the indications that pressure is certainly stepping up…

What is then the potential outlook for the next years? As this pressure keeps building up slowly but steadily, either:

1. Corporate Europe grows its earnings quite rapidly over the next one to two years in order to de-lever dramatically ahead of upcoming maturities, or;
2. Central banks stepping in (again) coupled with an overall risk premium coming down (and risk appetite going up) from current levels, facilitating refinancings at current leverage levels, or;
3. There will be a step up in proper restructurings where inevitably there will be more transfers of ownership from sponsors to lenders.

Depending on the speed of the first two things, certainly all the above could be partly true but regardless of how fast the first two would progress (if at all), we see it as a highly unlikely scenario where they outpace the pressure of restructurings. As such, we see it as inevitable that the coming years will be very active when it comes to the restructuring arena which will keep not only special situations and distressed debt managers busy together with restructuring advisers, but importantly it will certainly also keep both traditional sponsors and lenders very busy working through their problematic portfolio positions. We certainly know how intense that can be, and we do it as part of our everyday strategy.

It is clear corporate Europe would benefit from faster relief from over-indebtedness in certain pockets. We see this time and time again in our own restructurings where the quicker the balance sheet and liquidity issues are fixed, the faster the companies bounce back. The longer one wait, the more permanent the damage becomes. As described above though, there will be a lot of resistance slowing this down as various stakeholders hold on to option-value (“hope-value”), hence we still expect this cycle to be quite extended and include both pain and eventual relief a few years down the line as this plays out over time.

Having said all the above, we are overall optimistic about the future, not only from a special situations’ strategy point of view but also generally. “After rain comes sunshine” and any period of excess will be followed by remission, after which things will go trend back towards “normal” again. We saw the credit landscape transform itself following the GFC and with it eventually came an era of excess which, to some extent, allowed for undisciplined behaviour among some players going for rapid volume. While most credit managers are disciplined and seasoned investors, there will be some casualties when things get tested over the coming years, which is
part of any historical cycle.

We at Njord Partners always aim to be optimistic regardless of what tomorrow brings and are excited about our strategy which constantly presents both opportunities and intellectual stimuli through the variation of work we get to do. We are grateful for all the partnerships we see with clients, management teams, core set of advisers and many other friends of the firm, whether multi-year relationships or more recent.

We are certain the coming period of next years will offer a very interesting investment environment for our type of strategy and we look forward continuing taking an active part in the next phase of the European investment cycle.

Arvid Trolle
co-Portfolio Manager
February 2026