Loan breaches by highly leveraged European companies have doubled in the past year according to a research report by Standard & Poors’.
The report revealed that financing difficulties experienced by speculative-grade companies are likely to intensify as much of Europe enters into recession and private equity companies can no longer justify supporting portfolio companies with new equity.
Over the past 12 months, there were 38 covenant breaches, waiver requests or related restructuring in S&P’s sample of speculative grade issuers, compared with 18 in the previous 12 months, which is an increase of over 100%.
Historically, leveraged breaches are seen to be an early warning sign that companies are experiencing difficulties. Financial covenants are included in loan documentation and provide minimum levels of cash flow coverage and interest coverage or maximum levels of leverage and capital expenditure. Failing to meet these levels over a defined period can constitute a default, giving lenders the opportunity to reset lending terms, or in a worse-case scenario ask for their money back.
Standard & Poor’s leveraged finance research analyst Taron Wade said: “The acceleration in companies breaching covenants or needing resets is indicative of the very difficult economic conditions that highly leveraged companies are facing. In our view, the next two to three years will be very difficult for investors in this asset class as not only
breaches, but defaults, accelerate as well.”