Moody’s: debt wall subsides, risks remain

A recent Moody's study has found that Europe's LBO debt wall has declined rapidly.

High yield-backed refinancings have allowed Europe’s unrated leveraged buyout universe to ease its debt burden from €171 billion as of last May to €122 billion, according to a Moody’s Investors Service report released Tuesday.

The European LBO universe shrank from 368 companies last year to 288 this year, according to the report. The number of companies with debt maturing through 2015 has fallen from 254 to 159.

“This refinancing activity, combined with significant ‘amend-and-extend’ activity, has flattened the previous 2014-2014 refinancing peak,” according to the report, which examined the debt profiles of 288 unrated buyouts. “About 44 percent of debt now matures after 2015, double the 22 percent in the 2012 study.”

The spate of refinancings was spurred by the growing availability of high yield debt, which spiked in the wake of European Central Bank statements that supported a surge in issuance. Speculative grade companies issued $60 billion by the end of mid-May, significantly outpacing last year’s record issuance of $70 billion, according to Moody’s.

“Pricing of high yield bonds has also reached record lows, as investors look for yield,” according to the report. “This cheap pricing in particular has benefitted many companies carrying debt burdens that in previous cycles might have been considered unsustainable, but now have been able to refinance.”

However, that many change as investors grow more risk averse amid capital market dislocations and tougher pricing, according to the report.  

Furthermore, although the debt burden has declined significantly over the last year, the quality of the companies still facing heavy debt obligations have also deteriorated. The robust refinancing market had a positive effect on Moody’s credit estimates of companies with “relatively better profiles”, but 61 percent of Europe’s unrated LBO debt now scores 16 or weaker, where a score 17 indicates a more stressed capital structure, according to the report. As such, the maturity profile of the weaker pool remains concentrated around 2014 and 2015.

“Although the heightened refinancing activity has kept the debt default rate subdued despite the weak macro environment in Europe, we continue to expect that the default rate for these unrated names will increase materially over the next couple years,” according to Moody’s.