Dec 03 - Some of the companies that defaulted in 2010 with high recovery rates for loan
investors are likely to default again, Fitch Ratings says. This time more debt will be wiped off
their capital structures.
The recoveries on the first default do not reflect accurately the true value of the
defaulted and restructured debts for many low-rated European leveraged borrowers. This is
reflected in our rating assumptions about expected recoveries, which have so far been lower than
the observed recoveries for senior secured loans. We expect the final recovery rates after
further restructuring to be more in line with our assumptions.
Our view is that many of these defaulted borrowers remain vulnerable to renewed default. For
example, since 2008 in Europe 35 of the 57 leveraged borrowers that Fitch still has Credit
Opinions on after their default have credit opinions of 'CCC*' or 'CC*' after restructuring.
Five of those borrowers defaulted again, within an average of 16 months of their restructuring.
There have also been serial defaulters in the US. Our analysis in August showed that 50
issuers in the Fitch US High-Yield Default Index have defaulted twice or more since 2000.
The main drivers of the repeated defaults are failures to resolve challenges to the business
model, often operating cost issues, or to reduce debt to more sustainable levels. In Europe, the
flurry of light restructurings in 2009 and 2010 often included waiving covenants with some cash
injection, but without sufficient debt write-offs or easing of the interest burden.
Many of the weakest borrowers in Europe may be forced to write off a substantial part of
their existing debt when they reach their refinancing deadline, which for a large number of
borrowers is 2014. The absence of a primary loan market in Europe for the low-credit quality
borrowers means we expect them to find refinancing challenging.
For more information attend our London structured credit seminar on 4 December or see our
European Leveraged Loan CLO tracker.
The ' * ' suffix indicates Credit Opinions, which are not fully comparable in all regards
with published ratings at that level.