By Gillian Tett, Louisa Mitchell and Peter Smith
May 25 2006
SourcePrivate equity groups operating in Europe are loading the companies they buy with record levels of debt, new data show.
In particular, the so-called "leveraged ratio" - or the ratio of debt to core earnings - has risen sharply, suggesting that some companies could struggle to repay debt if their performance deteriorated suddenly.
So far there are relatively few signs that investors are concerned about these risks, since sub-investment grade companies are continuing to issue bonds and raise loans on very favourable terms - notwithstanding the recent bout of market turmoil.
However, some analysts warn that rising leverage levels could be storing up problems if interest rates rise or the economic outlook deteriorates.
"The risks in some deals are rising," says Edward Eyermann, analyst at Fitch Ratings. Paul Watters, analyst at Standard and Poor's, says: "We are concerned about the accelerated timetable for some of these [issues] . . . Are banks and investors being disciplined enough in their due diligence and their understanding of these deals, given their high-risk nature?"
One measure of this trend is the ratio between a company's debt and its core earnings - earnings before interest, tax, depreciation and amortisation - seen in the debt markets.
In March, companies raising finance that had a rating below investment grade had debt that was 5.73 times ebitda, according to S&P's Leveraged Commentary Data. This is the highest figure since the leveraged loan market started to be tracked in Europe in the late 1990s.
The ratio of "senior" - or secured - debt compared with corporate earnings has risen at a much slower pace, the S&P figures show. This suggests that companies are issuing riskier debt instruments.