Study: Equity injections rise in Europe

According to S&P, this year private equity firms have supplied 46 percent of portfolio companies breaching covenants with equity injections, up from a 20 percent response rate in 2006.

Loan breaches by speculative-grade companies in Europe have more than doubled while cash injections by private equity firms in response to such breaches have risen, according to a report from Standard & Poor's Ratings Services that examined more than 800 industrial companies from around the region.

“For the 12 months to 30 October 2008, we found there were 38 covenant breaches, waiver resets, or related restructurings in our sample of speculative-grade issuers, compared with 18 in the previous 12 months – an increase of over 100 percent,” said S&P leveraged finance research analyst Taron Wade in a statement. Of 64 total companies with covenant problem since the beginning of 2006, 48 percent were breaches.

The time between financing and covenant-related problems also lessened substantially since 2006, added Wade.

In 2008 to date, private equity sponsors injected additional equity into portfolio companies in 11 out of 24 cases in which covenant troubles arose. The 46 percent rate of response is up from 33 percent in 2007 and 20 percent in 2006.

In addition to the companies that have experience covenant difficulties to date, S&P observed many companies that it believes to be near to breaching covenants or may be in breach within several quarters.

S&P also predicts that defaults for leveraged loans in Europe will increase to 5.8 percent in 2009 translating to roughly 38 defaults. Among the 64 companies identified with covenant troubles, 11 have defaulted to date.