Fitch warns of the consequences of aggressive restructuring

06 April 2004

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Fitch Ratings has published a report encouraging investors to be wary of increasingly aggressive financing structures in European leveraged buyout transactions. The paper outlines the necessity for the market to try and avoid potential credit blow-ups. The agency notes that the current high levels of liquidity in all leveraged asset classes, combined with an improving macroeconomic environment and increasing bidding competition for assets, could result in overly aggressive capital structures and unsustainable debt levels for new leveraged buyout transactions. In a report entitled 'It's a Rollover - but not a Lottery', Fitch reviews the performance and issuance activity within the leveraged credit markets in 2003 and notes the buyout market's growing reliance on the recycling of existing transactions, either by secondary/tertiary buyouts or via straightforward recapitalisations. The report also comments on the substantial growth in the non-LBO leveraged corporate lending sector, reflecting a series of large restructuring transactions for fallen angels such as Ahold, Vivendi Universal, Alstrom and Heidelberg Cement. Fitch notes that the trend towards increasing financial leverage in LBO structures, exemplified by the hike in average total leverage ratios to 4.8x in 2003 from 4.4x in 2002, reflects renewed confidence among investors and the market's strong appetite for deals. Although a number of the recent, more highly leveraged transactions relate to seasoned credits with a proven ability to operate with financial leverage or to issuers in sectors with traditionally stable cash flow profiles, the risk exists that less robust transactions will find their way to market.