Business debt defaults expected to surge
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Finance directors have been warned that surging levels of debt and rising interest rates will see an increase in the number of debt defaults in the next year According to a report in Accountancy Age, the leveraged loan market in Europe has escalated from 35bn euros (Ł23.77bn) in 1998 to 500bn euros in 2005. The substantial increase in leveraged finance has been driven by the entrance of non-bank lenders such as hedge funds and what are known as collaterised loan obligations or CLOs. Andrew Merret, director in European special situations at Close Brothers, said that with so much debt available from hedge funds and CLOs, borrowers of weaker credit quality were able to raise debt. This meant that more defaults on debt repayments were a certainty. 'Many of these loans...have been made to borrowers of poorer credit quality. This in itself will cause default rates to rise whatever happens in the wider economy. But, with the upward pressure on interest rates, these structures will be severely tested. And there's going to be fallout,' Merret said. Merret warned that non-bank lenders were becoming more active in lending money than banks. This meant that when companies found themselves in difficulty, they had to cope with a completely new way of working through a restructuring. "Now, in leveraged or distressed situations, it's hedge funds calling the shots from the creditors’ camp," Merret said. Finance directors would have to adjust to the new trends in the market. The increase of non-bank lenders, who are far more willing to sell or buy distressed loans, means that they can no longer rely on relationships with their bankers to see them through difficult times. Merret said that hedge funds were less likely to enter a formal insolvency process, as they preferred to do a deal or sell the debt on in the secondary debt market. |
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