Distressed & Special Situations M&A in Europe: How Higher Rates Are Reshaping Control Investing

Distressed & Special Situations M&A in Europe: How Higher Rates Are Reshaping Control Investing

Higher rates are reshaping European M&A. As refinancing pressure mounts, distressed and special situations deals are increasingly driven by capital structure stress, with private credit and restructurings leading to negotiated control and ownership change.

At CGPH Banque d’affaires, we are seeing a clear evolution in European M&A. After more than a decade defined by abundant liquidity and low financing costs, the market is entering a different phase, one where transactions are increasingly shaped by capital structure pressure rather than purely strategic ambition.

The rate cycle of 2022–2024 has not triggered a systemic crisis, but it has fundamentally altered the economics of leverage. As a result, a growing number of companies are now facing refinancing constraints, not because their underlying businesses are broken, but because their balance sheets were built for a different cost of capital environment.

This shift is gradually transforming M&A into something more complex. Instead of traditional buyer-seller dynamics, we are seeing situations where creditors, sponsors, and new capital providers interact within restructuring frameworks, and where ownership outcomes are negotiated rather than simply transacted.

From Abundant Liquidity to Capital Discipline in European M&A

What distinguishes the current cycle is that stress is emerging without a collapse in demand. European corporates are operating in a context where growth is moderate but not absent, yet financing conditions are materially tighter.

The OECD has highlighted increasing refinancing pressure linked to higher interest costs and a significant volume of debt maturities coming due over the next few years. This “refinancing wall” is becoming a central feature of the European market. Companies that were comfortably financed in a low-rate environment now face a very different reality when approaching maturity.

In practical terms, this creates a situation where many businesses are still viable, but their capital structures are no longer sustainable. That is precisely where M&A begins to overlap with restructuring.

Why Restructuring Is Driving Ownership Change in Europe

Unlike previous downturns, Europe is not seeing a widespread wave of formal bankruptcies. Instead, the adjustment is happening through more controlled mechanisms, amendments, extensions, covenant resets, and, increasingly, debt-to-equity conversions.

This is a critical point. When lenders convert debt into equity or inject new capital with equity participation, they effectively become the new owners of the business. From an investment banking perspective, this is functionally equivalent to an M&A transaction, even if it originates from the liability side of the balance sheet.

As a result, distressed M&A today is less about acquiring assets in distress and more about gaining control through capital structure intervention. It is a shift from transactional dealmaking to negotiated ownership transitions.

The Role of Private Credit in Distressed & Special Situations M&A

Private credit sits at the center of this dynamic. Over the past decade, it has become a core financing channel for European mid-market companies, growing at a sustained pace and filling the gap left by traditional banks.

That growth now has second-order effects. Because private credit lenders are often the primary providers of capital, and maintain direct relationships with borrowers, they are also in a privileged position when stress emerges. They can influence restructuring outcomes, shape recapitalizations, and, when needed, step into ownership roles.

Current data suggest that while headline default rates remain contained, underlying stress is more visible when including restructurings and amendments. This creates a steady pipeline of situations where lenders are required to move beyond passive credit exposure and take a more active role.

How Distressed M&A Deals Are Executed in Practice

In this environment, the mechanics of M&A are evolving. Transactions are rarely straightforward acquisitions. Instead, they tend to be hybrid in nature, combining elements of credit and equity.

We are seeing investors acquire debt positions in secondary markets with a view to gaining control, provide rescue financing structured with equity upside, or participate in restructuring processes that ultimately result in ownership changes. In parallel, corporates under pressure are increasingly divesting non-core assets, creating opportunities for distressed carve-outs.

What ties these approaches together is a common principle: the entry point is often the capital structure, not the equity.

Why Europe Is Structurally Attractive for Distressed M&A

Europe offers a particularly interesting backdrop for this type of strategy. The market is characterized by a large and fragmented mid-market, a growing private capital ecosystem, and restructuring frameworks that tend to support negotiated outcomes rather than disorderly defaults.

This combination allows stress to translate into opportunity in a relatively controlled way. Rather than abrupt value destruction, there is often a transition phase where capital structures are reworked and ownership evolves. For investors with the right expertise, this creates a more predictable environment for deploying capital into complex situations.

Selectivity and Risk in Distressed & Special Situations Investing

That said, this is not a uniform opportunity set. The dispersion between strong and weak credits is widening, and the quality of underwriting, particularly from the more aggressive years of the cycle, is becoming increasingly visible.

Some companies will successfully navigate refinancing and emerge stronger. Others will require deeper restructuring or face more significant value impairment. For investors, the difference will depend on the ability to distinguish between temporary stress and structural weakness.

This makes distressed M&A a highly selective strategy. It rewards deep credit analysis, operational understanding, and structuring discipline.

Outlook for Distressed & Special Situations M&A in Europe

From our perspective, distressed and special situations M&A is set to remain a defining feature of the European market over the coming years. It reflects a broader transition from an era of abundant capital to one where financing is more disciplined and more actively managed.

In this context, the opportunity is not simply to invest in distressed situations, but to shape outcomes, to restructure balance sheets, to take control where appropriate, and to reposition businesses for the next phase of the cycle.

For professional investors, this represents a shift in mindset as much as a shift in strategy. M&A is no longer just about growth. Increasingly, it is about control, restructuring, and value creation through capital structure transformation.

Frequently Asked Questions on Distressed M&A in Europe

1. Why is distressed M&A becoming more relevant in Europe?

Because higher interest rates and maturing debt are creating refinancing pressure, forcing companies to restructure and opening the door to control transactions.

2. What role does private credit play in this trend?

Private credit funds are often the primary lenders, giving them influence in restructurings and the ability to convert debt into equity positions.

3. Are we seeing a wave of bankruptcies?

Not necessarily. Europe is seeing more restructurings and debt-for-equity swaps than formal bankruptcies.

4. What are the main risks for investors?

Poor underwriting, cyclical earnings exposure, liquidity constraints, and overpaying for distressed assets without a credible turnaround plan.

5. What makes a distressed M&A opportunity attractive?

A fundamentally viable business, strong creditor control, a clear deleveraging path, and the ability to implement operational improvements.