The UK’s Bank of England has today warned that a sharp jump in borrowing linked to private equity deals has left corporations at increasing risk of defaulting on loan commitments.A wave of leveraged buyout (LBO) activity in the UK, which has recently seen takeovers of BAA, the airports operator, and Associated British Ports, the ports group, has raised the average annual default probability of UK companies.
Furthermore, the activities of aggressive private equity firms is having the knock-on effect of tempting companies into taking on more debt to resist takeovers, according to the Bank of England’s twice-yearly Financial Stability Report.
“The direct impact of LBO transactions in 2004 and 2005 may have been to increase the average annual default probability of UK companies by about 0.2 percentage points," the report said.
LBO purchase prices have risen to record multiples of earnings with competition between lenders resulting in a "continued relaxation of loan covenants", the report added.
The buoyancy of the global LBO market was underlined by a research note published by Goldman Sachs this week that said LBO activity in Europe was on course for another strong year. “Following a spectacular 2005, when European LBO volumes almost doubled with respect to 2004, annualised 1H06 figures show that LBO activity remains on track to reach similar levels,” the research note said.
Meanwhile, Societe Generale today announced plans to expand its acquisition finance business into the Asia-Pacific region.
The Bank of England’s report cited research by Standard and Poor’s, the credit rating agency, which estimates that the debt taken on by a typical European LBO rose to more than eight times earnings in 2005, up from seven times in 2004. However, George Buckley, an economist at Deutsche Bank, said high debt levels in the UK corporate sector should be expected in the current benign interest rate environment. “Gross debt levels as a proportion of gross operating profits have increased rapidly since 1997," he said. "The only real threat to this appears to be from global commodity prices which pose an inflationary risk that may result in the Bank having to tighten interest rates.”
As RiskNews reported yesterday, Kamakura Corporation’s monthly global index of troubled companies showed a sharp increase in June to 6.4% of the global corporate universe, up from 5.7% in May and an increase from the record low 5.5% set in April (see: Credit quality sees rapid deterioration in June).
More on Structured Products
Target redemption forwards with capped loss structure set for launch
€50m structured note combines green bond with ethical equity index
Hichem Souli joins Baml as head of Emea client solutions distribution
Investors shrug off smaller coupons and higher barriers in August
Sign up for Risk.net email alerts
Nominated for two technology awards
Nominated for post trade technology award
Sponsored webinar: Collateral and counterparty tracking
Isda directors warn on fragmentation, access and liquidity - but expect problems to pass
There are no comments submitted yet. Do you have an interesting opinion? Then be the first to post a comment.