CORRECTED-European defaults remain high but conditions easing - S&P
(Corrects spelling of Paul Watters, S&P in 19th para, LBOs and CLOs throughout)
* Defaults highest in previously restructured companies
* Growing capacity of high yield market a major positive
* Bank appetite to underwrite picking up
By Robert Smith
LONDON, March 13 (IFR) - The European speculative-grade default rate will remain high in 2013 but credit conditions are improving as the leveraged buyout debt hangover from 2006-2008 runs its course, according to a report published by Standard & Poor's on Wednesday.
The report, titled "Defaults in Europe Remain Elevated, Although the LBO Debt Hangover Is Easing," found that defaults in the EU-30 for 2012 were high at 6.3%, equating to outstanding defaulted debt of more than EUR33bn.
These are the highest levels since 2009, when a record 103 speculative-grade companies equating to EUR62.4bn of debt defaulted, and show an increase on 2011 statistics when the default rate stood at 4.6%.
However, just under a third of last year's 45 defaults (nine publicly rated, 36 privately) were related to previously restructured companies, which S&P said was a positive factor.
"It may look scary, but the slightly more benign explanation is that the LBO hangover is starting to be dealt with in a more serious way," said Standard & Poor's credit analyst Paul Watters.
"Seventeen of the defaults we saw last year were for companies that had previously been restructured. For those companies the first round of restructuring was a minimal, light restructuring that obviously did not address the scale of their problems. Now they've come round again, you're seeing a much more robust approach taken."
Public defaults are much more rare. The most high profile so far this year is Italian directories firm Seat, which missed a bond payment on its 2017 bonds.
Another positive trend is the shrinking number of private credit estimates, which is partly attributed to the growing number of companies that have been able to refinance in capital markets.
"Favorable issuing conditions in the high-yield market expand the breadth and depth of the market. This translates into a more robust capital structure and reduced financial risk for many speculative-grade companies that can access this liquidity," S&P said.
In the past year, 100 credit estimates exited Sap's portfolio. The average credit quality of private estimates has been lower relative to companies that typically tap public markets.
Private credit estimates were prevalent before the financial crisis, and often stemmed from LBO-style loans held in collateralized loan obligations (CLOs). As more and more of these LBOs are acquired or refinanced, and CLOs are increasingly wound down, these credit estimates are no longer needed.
There is also a natural cap on the number of new private credit estimates that can replace them, as S&P puts limitations on the size of companies that can receive private ratings after the financial crisis.
This easing of the LBO hangover should allow the leveraged finance market to concentrate on newly originated transactions, and S&P believes that institutional investors and relationship banks appear to be stepping back into the fray.
"If you look at new transactions coming to market, although most deals are still club deals, you're struck not only by the size of some of loans, but also signs of a return in underwriting appetite," said Watters.
This year has even seen the return of jumbo leveraged buyout in the US - specifically for Heinz and Dell - which bankers predict will start to spillover into Europe.
"One of the challenges for the syndicated loan market in Europe has been the severe reduction in cross-border lending, but over the last six months you've started to see a correction."
TRIPLE C VULNERABILITY
That does not mean that 2013 will be any easier than the previous 12 months, which is reflected in a slightly higher proportion of Triple C entities at the end of 2012 at 5% versus 4% a year earlier.
These companies will find it harder to access the high-yield market, particularly if the economic outlook remains difficult.
Under S&P's base case scenario, the speculative-grade corporate default rate for EU-30 countries will be 6.1% in the next 12 months, which is little changed from the previous forecast for December 2013 of 6.3%.
Companies in peripheral regions are also vulnerable. The 2012 default rate in Spain doubled over 2011 to 14.3%, while that in Italy increased sharply to 9.5% from 5.7%.
Although companies from peripheral Europe are nudging the default rate higher, they are not to be blamed for the so-called LBO hangover. Instead, perhaps unexpectedly, the concentration is in core European countries.
The business climate for French LBOs has become more challenging, and S&P notes that support from French banks appears to have become more credit-specific.
"Default rates are much higher in the periphery, but the proportion of LBOs in the portfolio from countries like Italy and Spain is not that large," said Watters.
"Just over 60% of the speculative grade credits we track in Europe are from the major economies of France, Germany and the UK." (Reporting by Robert Smith, IFR Markets; editing by Natalie Harrison)
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