S&P: buyouts drive European defaults

Private equity-backed companies, such as Italian yacht builder Ferretti, accounted for 79% of defaulting companies during 2008, according to Standard & Poor’s. Default rates will continue to accelerate, says the ratings agency.

The number of Western European companies that defaulted on debt repayments last year was over three times more than in 2007, with private equity-backed businesses making up the vast majority, according to ratings agency Standard & Poor’s.

Of the 34 defaulting companies on the agency’s database in 2008, 27 – or 79 percent – were financial sponsor-backed.

In a report entitled Leveraged buyouts are fuelling surging defaults in Western Europe, Standard and Poor’s estimates that up to 29 percent of European speculative-grade companies – those rated BB+ or lower – could default by the end of 2010.

Ferretti:no longer backed by private equity

“We believe the acceleration in defaults that occurred in the fourth quarter of 2008 will continue through this year and possibly into 2010,” said Standard & Poor's credit analyst Paul Watters, “We also believe that debt-financed leveraged buyout transactions will be at the forefront of this increase.”

The S&P report notes that businesses in the real estate sector were hit earliest, while the chemicals, packaging, and environmental services sectors were also affected.

The numerous examples of recently defaulting businesses include luxury yacht maker Ferretti, which defaulted on an interest payment in February and entered a restructuring process that ended with its financial sponsor, Candover, walking away with nothing.

Other portfolio companies, such as Swedish manufacturer Thule and Finnish bathroom company Sanitec, have recently received so-called “equity cures” – cash injections – from their financial sponsors, EQT and Nordic Capital respectively, following debt repayment defaults.