European Leverage Finance Demand Risks Credit Quality, S&P Says

Junk-rated companies in Europe risk damaging their credit quality as demand for leveraged loans and high-yield bonds outstrips supply, allowing greater borrowing with fewer lender protections, according to Standard & Poor’s.

Companies are borrowing to make payments to shareholders, selling covenant-light loans and repricing debt sometimes less than a year after the original facility was sold, according to the report from S&P today. Issuance of high-yield bonds and loans rose to the most since 2007 last year, with debt arranged last year reaching 124 billion euros ($172 billion) compared with more than 170 billion euros in 2007, S&P data show.

“We see warning signs of the market overheating,” London-based S&P analyst Taron Wade wrote. “Demand has outstripped supply, with insufficient loans and bonds to meet investor demand.”

Interest in European leveraged debt reflects confidence in the euro zone, which was in jeopardy of breaking up just two years ago as Greece, Ireland, Portugal and Spain sought bailouts amid a sovereign debt crisis. Companies are expected to boost their issuance of leveraged debt in Europe this year by as much as 35 percent to 200 billion euros, Credit Suisse Group AG said in February.

Leverage ratios increased last year, with debt at an average 4.7 times earnings before interest, taxes, depreciation and amortization, according to the report. That compares with 5.2 times in 2005 and a peak of 5.9 times in 2007.

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