Bloomberg News

Half of Europe's LBOs Exceeding Debt Target, S&P Says (Update3)

February 13, 2008

Half of Europe's leveraged buyouts are missing their own targets for earnings and debt, putting them at greater risk of breaching investor safeguards or defaulting, Standard & Poor's said in a report.

``There is a heightened potential for defaults,'' S&P analysts led by Taron Wade in London wrote.

Fifty percent of the companies owned by buyout firms in S&P's study exceeded their debt forecasts and 53 percent missed earnings targets.

European buyouts slumped almost 60 percent to $88 billion in the second half of last year as the U.S. subprime mortgage crisis caused investors to shun all but the safest government debt. Buyout firms are unable to raise more than 1 billion euros ($1.45 billion) of debt for each deal as funds including collateralized loan obligations cut investments, Carlyle Group Managing Director Robert Easton said today at a conference in London.

In LBOs, firms borrow about two-thirds of the acquisition price, piling the debt onto the takeover target. The debt is typically ranked as high-risk high-yield with ratings below Baa3 from Moody's Investors Service and BBB- from Standard & Poor's.

Companies breached loan covenants or renegotiated terms on 8.3 percent of the debt included in New York-based S&P's study of 36 companies. Some firms aren't alerting investors to increased indebtedness because disclosure requirements were dropped from loans sold in the past two years, according to S&P.

LevX Index

Loan covenants typically set limits on the borrower's debt relative to its cash flow, or the amount it must maintain to meet interest payments. A company that breaks a covenant usually meets with its lenders, which may lead to changes in the loan terms.

Most leveraged loans in Europe aren't publicly rated, making it difficult to get information on the deals, the report said. S&P studied privately rated transactions, which make up 85 percent of leveraged loans in Europe, the ratings company said.

The study covered chemical, industrial equipment, publishing and retail companies. S&P didn't identify the borrowers.

The risk of defaults on European LBO loans is the highest recorded by the benchmark Markit iTraxx LevX Senior Index of loan credit-default swaps. The index fell to 90.625 on Feb. 11, the lowest since it began in October 2006, and traded at 91 today, according to Bear Stearns Cos. A level below 100 indicates loans are valued below par.

Monitoring the performance of LBOs is ``paramount'' for investors, the S&P analysts wrote. ``The exuberance of the leveraged financial markets in Europe over the past few years has meant that most transactions attracted an abundance of investors. But that does not mean all deals will perform well.''

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net


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