Buyout firms will target European retailers using non-investment grade debt to take advantage of low funding costs as the region struggles to emerge from an economic slump, Moody’s Investors Service said.
While retailers are unlikely to make acquisitions because the economic recovery has yet to positively affect household spending, about two thirds of funds raised for buyouts are “now high yield, reflecting an increase in leveraged-buyouts in the year and a low interest rate environment that supports the funding of these transactions,” Moody’s European retail analysts said in a report published today.
New ratings for debt “are likely to be high-yield” and “we expect this trend to continue while borrowing costs remain low,” Moody’s said.
Central banks have cut interest rates to record lows as European companies and consumers struggle with the fallout from the sovereign debt crisis and record high unemployment. Even so, retail sales in the euro region and the U.K. will grow by as much as 1 percent by the second half of 2014,, backed by “modest GDP growth,” Moody’s said.
The recovery will probably be uneven, with a pick-up in the U.K., Germany and France offset by a lag in Spain, Italy and Greece, according to Moody’s.
That will “weigh on earnings for companies with operations in those areas such as” French hypermarket operator Carrefour SA and electronics retailer Dixons Retail Plc, the ratings company said.
The European Central Bank and the Bank of England are expected to keep interest rates at record lows of 0.5 percent each when policy makers meet in Frankfurt and London tomorrow, according to two Bloomberg surveys.