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Europe LBO Loan Defaults to Rise on Refinancing Risk, Fitch Says

Weaker European leveraged-loan borrowers are set to default in greater numbers as the region’s high-risk companies face increased difficulty refinancing debt, according to Fitch Ratings.

Fitch, which assigns private credit opinions on about 280 European leveraged credits alongside its public ratings, said it classifies 23 percent of these companies as “at risk,” carrying gradings of B-* with a negative outlook or below, Fitch Ratings analysts wrote in a report.

These are “over-leveraged compared to primary market benchmarks and therefore require more time or restructuring in order to deleverage and return to sustainable business and capital structure profiles,” Fitch said.

Stronger borrowers are able to replace maturing debt with high-yield bonds or by raising funds through share sales, reflecting the polarized European leveraged loan market, according to the report. The 280 companies covered by Fitch have borrowings of about 265 billion euros ($340 billion), it said.

Companies classified as “at risk” operate in niche or “challenged” sectors, or in troubled European economies, Fitch said. Broadcasting and media companies account for 14 percent of companies rated at B-* or below, the largest sector concentration, the analysts wrote.

Refinancing the “at risk” companies may be more difficult because about 70 percent have subordinated debt, potentially complicating discussions with lenders, according to the report. About 85 billion euros of European leveraged loans are due to mature next year, according to data compiled by Bloomberg.

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