Bangkok--4 May--Standard & Poor's
Liquidity remains in full throttle, with a cumulative total of US$72.0 (EURO 54.1) billion brought to market in the bond and loan markets in Europe through the first quarter of 2007, according to an article published May 1, 2007 by Standard & Poor's. The report, titled, "Europe High-Yield Prospects: LBOs Create Risks For Credit Quality," states that bond issuance volume reached US$9.2 (EURO 6.9) billion, keeping pace with the volume recorded in the same period last year. Also, the growth in loan originations broke new ground, reaching yet another record high in both volume and number of deals.
"Demand for leveraged products has proliferated in recent years, led predominantly in Europe by private-equity sponsors, said Diane Vazza, head of Standard & Poor's Global Fixed Income Research Group. "In contrast with the U.S., sponsor-led activity provides an important source of deals in the European high-yield bond market. Leveraged buyouts accounted for US$59.4 (EURO 44.6) billion, or 94.4% of total loan volume in the first quarter (compared with 28.9% of total volume in the U.S.). The advent of these nontraditional players, however, introduces a new element of uncertainty in terms of the leveraged segment's response to enhanced volatility or cross-correlation with previously unrelated market segments."
Rating trends remain benign, but the combination of more leveraged structures, dividend payouts, share repurchases, and bond issues with loose covenants is an early warning of increased credit risk once the credit cycle turns. Moreover, defaults continue to tick up from record lows, even as concern grows that distress is being suppressed by the lowering of covenants, giving firms more financial wiggle room. Only one rated default--Luxfer Holdings PLC--was recorded in the first quarter. On a trailing 12-month basis, the European speculative-grade default rate increased to 2.3% at the end of March 2007, compared with 1.77% in December 2006 and 0.46% in 2005.
Ms. Vazza added "the impressive performance of the last several years leaves less headroom for supersized gains in 2007, but allocations to European high-yield may remain on track as long as investors have an abundance of cash to invest and credit quality does not falter substantially."
The report is available to subscribers of RatingsDirect, the real-time Web-based source for Standard & Poor's credit ratings, research, and risk analysis, at www.ratingsdirect.com . If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-9823 or sending an e-mail to [email protected] . Ratings information can also be found on Standard & Poor's public Web site at www.standardandpoors.com ; under Credit Ratings in the left navigation bar, select Find a Rating, then Credit Ratings Search. Members of the media may request a copy of this report by contacting the media representative provided.
Media Contact:
Mimi Barker, New York (1) 212-438-5054, [email protected]
Analyst Contact:
Diane Vazza, New York (1) 212-438-2760