Dec. 2 (Bloomberg) -- Royal Bank of Scotland Group Plc and Barclays Capital are supporting European companies with plummeting loan values by negotiating covenant waivers on their debt.

Banks including London-based Barclays are negotiating a waiver of conditions for Ineos Group Holdings Plc, the U.K.’s largest chemical maker, on 5.8 billion euros ($7.4 billion) of debt. The talks follow a similar deal by RBS in July on loans to Madrid-based Cableuropa SA.

Lenders in Europe are permitting the waivers at a fraction of the price charged by banks in the U.S., which hold less of the debt on their books.

“It’s bank self-preservation,” said Alex Moss, who oversees about $1.6 billion as head of high-yield bonds and leveraged loans at Insight Investment Management in London. “Banks are accepting waivers with as little fuss as possible to justify the high price they have their loans marked at.”

Leveraged loans are high-risk, high-yield borrowings rated below investment grade by Moody’s Investors Service and Standard & Poor’s.

European banks hold about 70 percent of loans, with the rest sold to investors such as hedge funds and pension managers, according to data compiled by Standard & Poor’s LCD as of the end of the third quarter. In the U.S., 20 percent of loans are distributed to banks.

Covenant waivers allow companies to breach terms and conditions on their loan agreements with banks. Covenants may limit the amount of debt a company can borrow as a proportion of earnings, or set limits on its spending.

Letting a borrower go bankrupt may force banks to write down the value of loans when prices are at a record low, adding to $271 billion of losses by financial companies in Europe.

U.S. Companies

U.S. companies paid an average 240 basis points on their loans’ face value to waive conditions this year, S&P LCD data show. Trinity, North Carolina-based Sealy Corp., the world’s largest bedding manufacturer, paid a 75 basis-point fee plus a 300 basis-point increase to the interest margin in November for such waivers on $517 million of debt. European companies paid 30 basis points, according to Bloomberg calculations based on data compiled by Deutsche Bank AG.

A basis point is 0.01 percentage point.

“In Europe, where banks drive more relationship-based lending, fees for waivers are still way off” compared with the risk lenders take, according to Chris Taggert, a New York-based senior loan strategist at debt-research firm CreditSights Inc.

Ineos Talks

Ineos, which had net debt of 7.29 billion euros as of Sept. 30, offered to pay its 233 senior lenders 50 basis points upfront, plus a fee of as much as 125 basis points a year, according to Chief Financial Officer John Reece.

The Lyndhurst, England-based chemical maker asked banks to waive loan conditions as sales slumped. Moody’s cut the company’s credit rating to eight levels below investment grade Nov. 18.

Traders of credit-default swaps are demanding investors pay the most ever for protection on Ineos, including an up-front fee. Barclays Capital and Merrill Lynch & Co., which arranged 5.8 billion euros of outstanding loans for the 2005 purchase of BP Plc’s Innovene unit in November, agreed to the waiver request.

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

William Bowen, a spokesman at Barclays Capital in London, said the bank is supporting Ineos’s waiver request, and declined to comment further. London-based Merrill Lynch spokeswoman Victoria Garrod declined to comment. Bank of America Corp. bought the world’s biggest brokerage last month.

Twenty-two covenant waivers were granted in Europe this year and only one was declined, according to Bloomberg data.

Role of Banks

“Lending banks inherently want to remain just that, lenders, and will only very reluctantly become owners of stressed businesses,” said Paul McKenna, London-based head of leveraged syndicated finance at ING Groep NV.

The European leveraged loan market is “more relationship driven” as “banks hold more of the paper” than in the U.S., said Siobhan Pettit, head of structured credit strategy at RBS, Europe’s biggest loan arranger according to Bloomberg data.

Borrowing costs rose to a record for companies with non- investment grade ratings, below Baa3 by Moody’s and BBB- by S&P, Merrill Lynch indexes show. Companies seeking covenant waivers typically carry debt used to fund their acquisition by private- equity firms, and a lack of cashflow makes it difficult for them to service loans.

With no access to capital to service their debt, some LBO companies may go bankrupt if creditors don’t allow them to break conditions on their loans. Bankruptcy may make the debt “impaired,” meaning creditors may have to write down holdings.

Loan Prices

The value of high-risk, high-yield loans is near a record low, according to credit default swaps on Markit Ltd.’s iTraxx LevX index. The index is at 79 today, Dresdner Kleinwort prices show, compared with an all-time low for the current series of 78.5.

Creditors write down the borrowings according to their recovery rate, which could be as little as 30 percent, according to Bloomberg calculations based on secondary-market leveraged loan prices.

Cableuropa, Spain’s biggest cable TV operator, paid as much as 1 percentage point for a covenant waiver on 3.6 billion euros of loans from banks including RBS and Calyon in July, S&P LCD data show. Moody’s said in October it may downgrade the company.

Cableuropa Agreement

Grupo Corporativo Ono SA, Cableuropa’s parent, sought to “modify covenants for 2009 and 2010, while the company complies with covenants for this year, which is not the profile of a company in real trouble,” said a spokesman for the company in Madrid, who declined to be named because the negotiations were private.

Ila Kotecha, a London-based spokeswoman for RBS, the Cabeleuropa loan’s facility agent, declined to comment.

Lenders to French auto-parts distributor Autodistribution SA changed conditions on 535 million of outstanding debt in August while Virgin Media Inc., the U.K.’s second biggest pay-TV company, said last month it’s paying lenders to defer payments.

New York-based Virgin Media’s debt risk doubled this year to within 40 basis points of what traders consider distressed levels, credit-default swaps show.

Virgin Media “proactively sought to address its amortization payments,” and the waiver will give the company “significantly more time to seek a complete refinancing of the principal amounts,” a London-based spokesman, who declined to be named, citing company policy, said in an e-mailed statement.

A spokesman for Autodistribution couldn’t be reached.

To contact the reporter on this story: Caroline Hyde in London chyde3@bloomberg.net

Last Updated: December 2, 2008 15:04 EST