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Moody’s: 25% of European leveraged loans face default

At least a quarter of companies in Europe whose collective €133bn debt is due to mature within the next two to three years will default, warns Moody’s Investor Services, despite efforts to refinance the sizeable loan book.

Private equity firms which manage European companies are facing a significant refinancing challenge, as €133 billion of debt nears maturity by the end of 2015. At least a quarter of the 254 companies with debt maturing by then which featured in a Moody’s Investor Services report will default, Moody’s predicts.

The proportion could rise to as many as a half if economic factors combine to shut down the high yield bond market for extended periods, Moody’s said.

The 2014-15 refinancing peak remains large and worrisome given our expectations of protracted macroeconomic weakness

More than half the debt due to mature by 2015 is held by just 36 of the 254 companies surveyed, each of which has in excess of €1 billion of liabilities on its books.

Moody’s found debt due to mature in 2013 had been reduced by 75 percent, suggesting firms had been proactive in refinancing the most urgent loans.

“However, the 2014-15 refinancing peak remains large and worrisome given our expectations of protracted macroeconomic weakness, combined with the weak average credit quality of this universe,” the report said.

Due to the proliferation of ‘amend-and-extend’ arrangements, 22 percent of the overall debt (€171 billion according to the study) will now mature after 2015, compared to just 11 percent in last year’s equivalent report.

The UK (€54 billion), Germany (€33 billion) and France (€32 billion) constitute 70 percent of the overall debt. France has been especially proactive in reducing corporate debt levels, slashing its amount from €47 billion last year. Nordic debt has also fallen, from €20 billion to €13 billion this year.

By sector, business services companies are the most indebted (with €30 billion of debt), ahead of retail (€26 billion), media (€21 billion) and manufacturing (€19 billion).

Most worryingly for private equity firms, more than half the debt which needs to be refinanced carries a weak rating, suggesting it will be hard if not impossible to refinance using high yield bonds.

Almost a quarter of the debt maturing through 2015 carries Moody’s lowest rating, which it says equates to a “stressed capital structure”. Moody’s said that overall, the quality of debt maturing in 2015 is lower than in last year’s study, although the overall amount is smaller.

The openness of both European and US high-yield markets will largely determine how this refinancing burden is navigated

So how are firms going to refinance this debt? “The openness of both European and US high-yield markets will largely determine how this refinancing burden is navigated,” the report said. “Market access will remain in ‘windows’, and we expect new-issuer pricing to remain expensive,” the report warned.

“We also expect more companies to attempt to amend-and-extend loans in 2012. Lending options for collateralised loan obligations will become increasingly constrained, particularly from 2013, as their reinvestment periods end. This restriction will precipitate more fundamental debt restructurings for weaker credits.”

Moody’s also suggested GPs would be loathe to invest further equity in struggling businesses, unless their existing equity could be preserved by doing so.

“We do not expect that private equity sponsors will inject further capital into their own distressed companies primarily to assist their lenders. Sponsors may provide further funding where they believe equity value remains despite high leverage. In some cases, as in the first half of 2009, the injection of new sponsor funding may compete with distressed funding to allow sponsors to retain (or gain) control over companies. Such funding will often occur at a super-senior level, combined with material debt restructuring,” it said.