Speculative-Grade Defaults to Peak at 15% in Europe, S&P Says

By John Glover

Sept. 10 (Bloomberg) -- Defaults among speculative-grade companies and issuers of so-called leveraged loans will peak at about 15 percent this year in Europe, Standard & Poor’s said in a report.

A total of 48 companies failed to meet their commitments in the six months to June 30, compared with six in the same period last year, S&P said in a report today on the leveraged loan market. That has pushed the trailing 12-month default rate to 11 percent, S&P said.

“Companies with highly leveraged capital structures are having a difficult time of late coping with the dislocation in credit markets that began in mid-2007 and the severe downturn in the global banking sector that followed in September 2008,” S&P analysts led by Paul Watters in London wrote in the report.

Companies purchased in 2006 have the highest failure rate, S&P said. A total of 17 firms acquired that year, with average debt of 5.4 times cashflow, have defaulted compared with nine transactions with debt at six times cashflow from 2007, S&P said.

“However, we expect that a significant proportion of transactions that will be restructured in 2010 are likely to be those completed in 2007,” the analysts wrote. “Many of those companies are likely to face covenant breaches or liquidity issues on the back of amortization payments.”

In a separate report on the performance of 90 companies that went through a leveraged buyout, S&P said 45 percent were more than 10 percent behind their forecasts for earnings before interest, tax, depreciation and amortization. That compares with 31 percent as of the end of 2007, S&P said.

In a leveraged buyout, companies borrow in the name of the company they’re acquiring. Speculative, or non-investment grade, debt is rated below BBB- by S&P and Baa3 by Moody’s Investors Service.

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