Moody's warns on leveraged loan maturity wall

Call it what you like - a cliff, mountain, wall or hump - Europe's EUR133bn-worth of leveraged buyout loans maturing over the next three years is more of a challenge than ever, Moody's Investors Service said in an annual report published on Tuesday.

The escalating eurozone crisis, dismal economic growth prospects, the demise of collateralised loan obligations, increasing pressure on banks to pull the plug on the most distressed credits and a volatile high-yield bond market will make it difficult to refinance, the rating agency said.

Private companies have made significant progress in chipping away at maturities falling due 2012-2015. Around EUR48bn has been refinanced over the past year, either with high-yield bonds or via amend and extend agreements on terms and maturities of existing loans with lenders, Moody's said.

But the weaker credit quality of the loans left to tackle has increased the risk of defaults and a possible subsequent wave of restructurings, Moody's said, especially as demand from CLOs, which are nearing the end of their reinvestment periods, wanes.

"The wall may be smaller, but much of the better credit quality loans have moved out, and so what we're left with is a bigger concentration of weaker credits," said Chetan Modi, senior vice president at Moody's.

Moody's estimates that around 25% of the 254 companies in its study will default over the next three years, and the rate could double if external factors shut the high-yield market for extended periods.

A year ago, Moody's forecast was for a more conservative 20% default rate.

"We are one year closer to the 2014-2015 refinancing peak, which remains worrisome given the weak macroeconomic environment and the generally low credit quality of this debt," Moody's said.

"The openness of both European and U.S. high-yield markets will largely determine how the refinancing burden is navigated. Market access will remain in 'windows', given the ongoing euro crisis, thereby reducing that market's ability to absorb the supply of debt."

RUNNING OUT OF OPTIONS

The progress made so far in pushing out maturities has taken some pressure off. Loans maturing in 2013 have reduced by 75% over the past two years and the 2014 peak flattened by about EUR12bn to EUR60bn.

In addition, of the overall EUR171bn debt maturing from now and beyond 2015 - down from EUR207bn a year ago - 22% matures in 2015 or later compared to 12% a year ago.

Whether the weaker credits will be able to access the high-yield market, however, is questionable.

Fifty-five percent of the loans maturing up to 2015 have been scored at 16 by Moody's, which is equivalent to a rating of B3 or lower. Perhaps more worrying is the 23% of debt scored at 17 - or an equivalent Caa1 rating - which implies a stressed capital structure, the rating agency said.

Last year's EUR38.75bn high-yield bond supply fell well short of the lofty EUR60bn analyst expectations sounded at the start of 2011, and although the market has bounced back, fears are rising that another second-half gridlock is in store.

Supply is currently running at USD32bn for all European high-yield issuers, according to Thomson Reuters data, but the market faced a significant set-back earlier this month when several deals struggled to get done.

One issuer, German roofing materials group Monier, pulled a deal after refusing to give in to investor demands for a coupon in excess of 10.5%.

DISTRESSED OPPORTUNITY

Moody's predicts a dispersion in default rates between rated speculative-grade credits that have proven access to high-yield bond markets and unrated LBOs.

European speculative-grade defaults are currently 2% and are expected to rise to just below 3% by the end of the year, according to Moody's. The default rate peaked at around 12% in 2009.

For those companies that do not have access to high-yield - either because of their weak credit quality or limited size of their debt - their other option is to amend and extend the terms and maturity of their loans.

That is expected to get more difficult.

"Banks are still reluctant to write-down debt if they don't need to, but the situation may be taken out of their hands if their funding partners, the CLOs, are constrained and are unable to participate in amend and extends," said Moody's.

"There hasn't been a situation yet where this has prevented an amend and extend, but it's a factor that has to be taken increasingly into account. It will have a much more dramatic impact next year".

That could result in a big opportunity for distressed funds, he added, who anticipated a big spike in restructurings in 2009 which failed to meet expectations. That, to some extent, was because both banks and CLOs were both more willing and able to agree amend and extends then.

"There's a sense that this time round, that this is less of an option and that should mean more opportunities for distressed funds," Modi said.

The timing of that, however, is difficult to forecast.

"Whether we'll see a deluge or a steady flow of restructurings is uncertain." (Reporting by Natalie Harrison; Editing by Julian Baker)

Source Reuters