Private equity ownership damages ratings - S&P

LONDON, March 1 (Reuters) - Businesses bought by private equity funds that borrow money to pay their new owners a dividend have contributed to a decline in the credit quality of European companies, ratings agency Standard & Poor's said.

The share of speculative-grade rated companies in Europe rose to 17.2 percent in 2006, from 1.2 percent 15 years ago, and 5 percent in 1996, the agency said in a report on Thursday.

In the U.S., the proportion of speculative-grade rated companies reached 50 percent at the end of last year, it said.

"The advent of private equity sponsors (funds) in the past three years introduces new risks for European ratings," the report said.

"Companies within this group are potentially undermining their credit quality through the use of dividend recapitalization plans to boost returns and quickly recoup their initial investment in sponsored companies."

Record private equity and hedge fund investment in European companies helped lift leverage levels to 5.4 times corporate profits last year, more than the 4.3 times in 2003, according to research from Goldman Sachs Group Inc.

Private equity firms Kohlberg Kravis Roberts & Co. [KKR.UL] and Texas Pacific Group [TPG.UL] said on Monday they would acquire U.S. power company TXU Corp. for $32 billion, the largest leveraged buyout in history.

Globally, the ratings deterioration in the speculative-grade segment is a concern, Standard & Poor's said, as the share of single-B rated companies to all the speculative-grade rated debt reached an 11-year high of 52 percent in 2005, and remained above 50 percent last year.

A single-B rating is Standard & Poor's third category within the speculative-grade ranks, following 'BBB' and 'BB.'