Europe bankruptcies to surpass 1990s: Blackstone

By William Kemble-Diaz

LONDON (Reuters) - The number of European companies going bust in the next few years will surpass anything seen in the early 1990s because firms bloated by debt have minimal room to put their finances in order, Simon Davies of Blackstone Group (BX.N) said on Friday.

Davies, a vice president in the U.S. private equity firm's European corporate advisory unit, told the Reuters Restructuring Summit that more firms would be forced into bankruptcy than in previous downturns due to the unprecedented speed with which their financial health could worsen as liquidity shriveled.

"We have increasing pressure on our time," Davies said. "The credit expansion phase was so large and so long that it has created a much more difficult restructuring arena."

Davies said covenants had been stripped to the bone as lenders scrambled to provide funding when the going was good, leading to a credit boom and to a subsequent bust whose fallout would be hard to manage.

The credit default and insolvency process is increasingly packaged as one event rather than as separate chapters in a progressively worsening credit story, he said.

As a result, restructuring in Europe will begin to chime more with the experience in the United States, where bankruptcy rates were historically higher because companies in distress often filed for bankruptcy to protect themselves from creditors and to buy time, Davies said.

Historically, in the United States, about 75 percent of all debt defaults have related to bankruptcies, but in Europe the figure is more like 50 percent, according to Kenneth Emery, director of corporate default research at Moody's.

The gap is largely due to differences in bankruptcy regimes as liquidation is a more likely outcome of bankruptcy in Europe than in the United States, Emery said. He stressed U.S. companies filing for Chapter 11 have greater room for maneuver to work on a solution, such as a debt restructuring.

European bankruptcy legislation is more varied and untested and could be less debtor-friendly than in the United States.

There was also a greater desire among European banks, companies, and policymakers "not to let things default at this stage," Davies said.

Such efforts were only likely to ensure European bankruptcies peaked later than in the United States, he said.

The scale of the credit crunch and the shrinking wiggle room meant bankruptcy would increasingly become an option for European firms caught out by the liquidity crisis and in need of restructuring, he said.

"It is probably going to increase the amount of precedents we set around the use of bankruptcy procedures to effect restructuring in as value-enhancing a way as we can," he said.

"And it is also is going to mean far more bankruptcies generally."

(Editing by Paul Bolding)