`Wave of Defaults' Expected in 2012 as Rates Rise, S&P Says

Higher interest rates and refinancing risks will likely prompt a “second wave of defaults” in Europe in 2012 and 2013, particularly among leveraged buyouts, according to Standard & Poor’s.

The 12-month European default rate may rise to as high as 7.5 percent in 2012 from an expected 4 percent by the end of this year, S&P analysts led by Paul Watters in London said in a report. The rate reached a peak of 14.8 percent at the end of the third quarter of 2009.

The default rate could rise “materially” as a high proportion of loans in the high-yield B- and CCC categories remain vulnerable due to excessive leverage, the analysts wrote. A substantial number of weaker junk companies with 229 billion euros ($302 billion) of leveraged loans due by December 2015 could face difficulties refinancing, according to the report.

“A combination of overleveraged balance sheets and higher spread margins against a rising interest-rate environment will likely result in more restructurings as shareholders’ attention moves to creating value on new transactions,” the analysts wrote. “We therefore see a high likelihood of a second wave of defaults, mainly among leveraged buyouts.”

The default rate, which fell to 5.9 percent at the end of September may return to a range of 5.5 percent to 7.5 percent in 2012 after declining “modestly” through 2011 to 3.8 percent, according to the report.

High-yield, or junk, debt is rated below BBB- by S&P and an equivalent Baa3 by Moody’s Investors Service.

In the U.S., S&P also sees a risk that defaults could rise in 2012 because of the “significant” overhang of leveraged corporate borrowers, the ratings company said in an Oct. 29 report. A majority of issuers that went through distressed debt exchanges remain in the low speculative-grade categories, S&P analyst Diane Vazza in New York said in the report.

“Unless operating profits improve markedly for these entities or leverage declines, they likely will continue to face high default risk,” she wrote.

To contact the reporter on this story: Bryan Keogh in London at bkeogh4@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net

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