Weak Q4 Portends Worse European Leverage Market

LONDON (Reuters) – Mounting loan covenant defaults have hit bankers’ desks in early 2009 as fourth-quarter results reveal the scale of European leveraged companies’ distress, but bankers warn that worse lies ahead.

The apt reporting deadline of Friday 13th for leveraged companies’ fourth-quarter loan covenant tests is likely to pass without immediate result as most of the bad news has already emerged in recent weeks, senior loan investors said.

“A lot of the fourth quarter numbers are out in the open but there will be more pain in the first and second quarter,” a senior leveraged loan investor said. The scale of the problem that lies ahead means quick decisions might have to be taken on companies that are already in distress, particularly those in the depressed automotive and construction sectors, banking sources said.

“Deals that had some stay of execution in the fourth quarter will come down in the first and second quarter,” the senior leveraged loan investor said.

Most leveraged companies in the auto and construction sectors are expected to be at or though their loan covenants when fourth-quarter results emerge due to the widespread collapse in demand amid the economic slowdown.

“Most auto or construction companies have seen performance drop so much they will be breaching covenants. If not on the fourth quarter results, there will be potential events of default on the next quarter analysis,” a head of leveraged loans said. Performance is expected to be poor across the board for Europe’s heavily indebted leveraged companies due to the speed and severity of the downturn, which has left cyclical industries particularly exposed.

“Its happening very quickly, that’s the issue. Corporates can’t react quickly enough to cut the cost base to counteract this. No-one’s ever seen quicker deterioration than this, its unprecedented,” the head of leverage said.

The auto sector is vulnerable as the weakest performing sector in the secondary loan market, data from Thomson Reuters LPC (TRLPC) showed, with average bids at a mere 23.2 percent of face value.

These levels indicate high default rates and heavy losses for lenders, which are starting to crystallise. German car parts supplier Edscha AG filed for insolvency last week and is likely to be auctioned. The construction sector is the second worst performing sector at 34 percent of face value, the TRLPC data showed, as companies such as French tilemaker Terreal Group and French buildings materials group Monier Group (previously Lafarge Roofing) struggle to restructure their debt.

The wide-ranging nature of the downturn means companies in the general manufacturing, chemicals, media, leisure and retail sectors, which are seeing their loans trading little higher at 49 percent to 55 percent of face value, TRLPC data showed, also face multiple covenant breaches.

Banks are looking to the companies’ private equity owners for support, but the scale of the crisis means private equity firms are taking a view on which of their investments are viable and worth saving, banking sources said.

By Tessa Walsh
(Editing by Andrew Macdonald)