Defaults Set to Rise in Europe a Year After Credit Crunch Began

By John Glover

Aug. 7 (Bloomberg) -- A year after losses on U.S. subprime mortgages caused a seizure in credit markets worldwide, European companies are starting to default.

As many as 6 percent to 7 percent of corporate borrowers may fail to pay debts on time in the next year, a tenfold increase from June, according to Dresdner Kleinwort, a unit of Germany's third-biggest bank. That would be the highest since July 2003, according to data compiled by Moody's Investors Service, straining an already faltering economy.

``Companies that would have refinanced a year ago find now that they can't,'' said Andy Stoneman, managing partner at MCR Corporate Restructuring in London, the administrator for General Trading Co., the store where Prince Charles and Princess Diana had their wedding list.

Tighter credit and rising fuel and commodity prices led to Europe's biggest bankruptcy in five years last month when Spanish developer Martinsa-Fadesa SA defaulted on 5.2 billion euros ($8.1 billion) of debt. French vodka maker Belvedere SA sought protection from creditors last month. The number of U.K. companies facing a ``critical'' funding shortage jumped eightfold in the past year, according to restructuring adviser Begbies Traynor Group Plc.

Borrowers that can get capital are paying near-record costs. Yields on high-yield, high-risk bonds sold by European companies rose to 12.8 percent, from 8.1 percent a year ago, according to Merrill Lynch & Co. index data. That compares with 11.6 percent for U.S. bonds rated below Baa3 by Moody's and lower than BBB- by Standard & Poor's.

`Matter of Time'

``We're only now starting to see a serious impact from the crisis in the euro-zone economy,'' said Christine Li, an economist at Moody's in London. ``It's only a matter of time before larger companies feel the impact of squeezed credit conditions.''

Moody's cut the long-term credit ratings on 190 western European companies this year and raised 74. In the same period last year, it lowered 217 and increased 494.

The volume of loans to European companies is down by about 50 percent to $590 billion this year, compared with the same period of 2007, according to data compiled by Bloomberg.

The high-yield bond market is virtually shut, with one sale this year of 75 million euros ($116 million) by Strabag SA, the Austrian builder trying to expand into Russia and the Balkans. European borrowers issued $30.6 billion in the same period of 2007. U.S. companies have sold $60 billion this year, compared with $103 billion a year ago.

Unlimited Cash

Credit markets froze on Aug. 9, 2007, as mounting losses on securities linked to subprime mortgages led banks to restrict overnight lending. The European Central Bank took the unprecedented step that day of offering unlimited cash and Paris- based BNP Paribas SA halted withdrawals from three investment funds because it couldn't value its holdings.

A year later, the difference between the interest rate banks charge for three-month euro-denominated loans relative to the overnight indexed swap rate shows cash still isn't easy. The so- called Libor-OIS spread was 62 basis points yesterday, in line with the average over the past year. In the first seven months of 2007 the spread averaged 5 basis points, or 0.05 percentage point.

European banks and financial institutions recorded $221 billion of losses and writedowns related to subprime debt since the start of 2007, compared with $250 billion in the U.S., according to data compiled by Bloomberg.

Companies in countries where real estate has been the main measure of wealth are suffering the most. As Spain's 15-year property boom ended, Martinsa became Europe's biggest bankruptcy since Parmalat Finanziaria SpA, Italy's largest food company, defaulted on 5.2 billion euros of debt in 2003. A Martinsa spokesman in Madrid, who declined to be named because of company policy, wouldn't comment.

``There's a strong link between the feel-good factor of a healthy housing market and consumer confidence,'' said Ed Stansfield, an economist at Capital Economics in London and a former adviser to the U.K. Treasury.

Sept. 11 Attacks

Confidence in the euro-region's economic outlook fell last month by the most since the Sept. 11 terrorist attacks, the Brussels-based European Commission said July 30. The ECB forecast in June that economic growth will slow to about 1.5 percent in 2009, from 1.8 percent this year and 2.7 percent in 2007.

In Europe, there is the potential for ``things to be worse than in the U.S.,'' particularly in countries such as Ireland and Spain, said Holger Schmieding, the chief European economist at Bank of America Corp. in London.

Bad news for borrowers may become good news for investment bankers who advise creditors and companies restructuring their debt.

``We're very, very busy,'' said Mark Fry, head of the London office of restructuring adviser Begbies Traynor. His working day has increased 40 percent from a year ago. ``We're hiring new people and the staff are all working longer hours.''

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net