EUROPE - Standard & Poor's has predicted as many as 29% of existing Western European speculative-grade companies could default on their debt agreements by the end of 2010.

Analysts writing in the latest RatingsDirect report suggest between 90 to 122 Western European firms which have either a speculative-grade public rating or credit estimates of BB+ or lower could in fact default on their debts in some way this year alone, while the same number - representing another 11.7% to 14.7% of the market - could again be seen in 2010, sparking the prospect of damage to investor positions, including pensions funds.

There are currently 765 corporate ratings and credit estimates tracked by S&P, but the bulk of these, 625, are in the private equity space and many of these were set to facilitate the growth of buyouts in previous years through high levels of borrowing.

The scale of problem is driven largely by the huge number of private equity-led leveraged buyouts conducted in 2005-2007, suggests the firm's rating service, as 45% of those debts are due to mature within the next two years, and worth €65.2bn, but current market conditions mean lenders may be unwilling to help.

"A further €47.4bn [of debt will] mature in 2015," said S&P. "In our opinion, this issues will arise in late 2010 and during 2011. The risk is that refinancing may be very difficult to arrange at that time for companies unable to retire their debt by maturity."

S&P continued: "We see the risk to currently vulnerable companies being that their lenders have neither the appetite nor the capacity to provide new financing to help them through the downturn."

While some firms are some years away from having to refinance their debt, the need to improve working capital, especially at privately-financed companies, mans many firms are already attempting to restructure their finances ahead of any potential covenant breach.

This may be beneficial in some respects as it could mean firms tackle their over-leveraged balance sheets now to preserve long-term value.

In turn, however, covenants are being tightened and this is placing even greater pressure on borrowers, suggested S&P, at a time when liquidity is already scarce.

The speculative-grade companies, which will have investors such as European pension funds on their books, are also less likely to receive support from European central bank financing initiatives, according to S&P, as many of the projects such as the European Central Bank's repo refinancing appear to be targeted more "toward small and mid-sized enterprises and investment-grade issuers".

Certain markets are more vulnerable than others, pointed out S&P, most notably the commercial real estate sector and consumer-related industries, while regulated utilities, telecoms operators, drugs manufacturers and branded consumer product companies are likely to "be more sheltered from the current steep downturn", according to S&P Rating Services.

Default rates in 2008 reached just 4.5% compared with the now predicted high of over 14% a year until 2010, but the default rate seen during this financial crisis could be higher than the 12% peak experienced in the 2001-2003 downturn.

S&P defines a ‘default' as missed payments, bankruptcy filings or a distressed debt exchange.

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