Lenders tougher on Europe covenant breaches -S&P

LONDON, April 29 (Reuters) - Lenders are moving more swiftly to initiate full debt restructurings in European companies that break key financial ratios as credit remains scarce and the recession hits more businesses, an S&P study shows. The average time taken for a company to default on a debt payment, make a distressed debt exchange or restructure after breaching a covenant fell to just two months in the second half of 2008, from 7.5 months in the first half of the year, Standard & Poor's said on Wednesday.

"The lack of available credit appears to have altered lenders' approaches to dealing with distressed borrowers," S&P said in its study of more than 750 European speculative-grade companies.

"We believe that there will continue to be less time between failing covenant tests and restructurings or insolvency filings, as support from lenders decreases due to capital constraints," it added.

Debt buybacks, equity injections and asset and business unit sales are becoming more common or, where those are not an option, financial and operational restructurings, S&P said.

Financial covenants are primarily designed to alert lenders to specific changes in a borrower's financial position and to allow lenders more time to take action in order to try to resolve problems.

More generous covenant terms set between 2005 and 2007, however, mean companies can withstand bigger earnings declines and increases in debt before covenants are breached.

Ultimately, some companies have deteriorated sharply before lenders can take any remedial action.

"The loosening of financial covenants has coincided with one of the most difficult European economic environments for the past 30 years," said S&P.

There were 34 speculative-grade corporate defaults in 2008. That represents a default rate of 4.5 percent, more than three times higher than that in the previous year, S&P said.

"We anticipate that in 2009 this will rise to between 11.5 and 14.7 percent," the ratings agency said.

There was a 90 percent increase in the number of European covenant breaches or waiver requests in 2008 to 59, from 31 in the previous 12 months. To date, only seven companies appear to have breached their covenants or requested waivers in 2009, S&P added.

Just this week, creditors of Thomson SA TMS.PA gave the loss-making French media technology company a waiver until June 16 to restructure its debt [ID:nLR123488].

British subprime lender Cattles CTT.L warned last month it may have breached the terms attached to its bank loans.

"While this figure seems low, considering the fundamental difficulties facing speculative-grade European companies, we expect additional breaches will be reported in the first quarter of 2009," S&P said.

"In some situations, lenders may elect to begin restructuring negotiations rather than reset covenant terms and continue with current capital structures which, in the context of current conditions, may involve unsustainable amounts of debt." (Reporting by Natalie Harrison; Editing by Andrew Macdonald)