European Credit Strategy: 1Q26 Fundamentals: Quality-Led Resilience

Research evidence excerpt

European Credit Strategy: 1Q26 Fundamentals: Quality-Led Resilience

Idea

June 26, 2026 04:40 PM GMT

Morgan Stanley & Co. International plc+MEuropean Credit Strategy | Europe Aron Becker

Strategist

1Q26 Fundamentals: Quality- Aron.Becker@morganstanley.comEllie Dann +44 20 7677-0754

Ellie.Dann@morganstanley.com +44 20 7425-2599

Led Resilience Jonathan Loke

Jonathan.Loke1@morganstanley.com +44 20 7677-3136

Ahead of the 2Q26 earnings season, we take stock of

Morgan Stanley India Company Private Limited+

fundamental metrics of European credit issuers as of 1Q26, and Yagyesh Modi

update our sector selection model. StrategistYagyesh.Modi@morganstanley.com +91 22 6995-2808

Investment grade – encouraging trends but cyclical sectors continued to lag

• Gross leverage improved in 1Q26, falling to 2.9x as slower debt growth was

Exhibit 1 : Leverage of the median IG issuer

offset by a modest rebound in earnings. Revenue growth remained subdued

improved in recent quarters, down 0.1x from

but robust margins supported the rebound. The improved earnings outlook

the peak in 2025.

creates further fundamental tail-winds.

EU IG Gross Leverage

• Liquidity buffers have continued to normalise, with cash-to-debt ratios now 3.8x Gross Leverage (Inc. Op Lease)

3.6x Gross Levg (ex. Op Lease)

firmly back in the pre-Covid ranges. Unlike US corporates, capex spend in 3.4x

Europe remained subdued while free cash flow growth has slowed. Interest 3.2x

3.0x 2.9x

coverage remains resilient as interest expenses showed a second consecutive 2.8x

2.7x

quarter of decline. 2.6x

2.4x

• Aerospace & defense, energy and telecoms rank highest on our multi-factor 2.2x

2.0x

framework after incorporating technicals, valuations, corporate aggression '03 '05 '07 '09 '11 '13 '15 '17 '19 '21 '23 '25