OREANDA-NEWS. Fitch Ratings says default rates among highly speculative European leveraged loan borrowers will remain at post-crisis lows of approximately 2% through the rest of 2015. In its latest European Leveraged Loan Chartbook, Fitch says that despite a rise in median leverage multiples and deterioration in underwriting standards since 2013, active refinancing of post-crisis transactions and the gradual exit of pre-crisis high-risk credits has reduced default risk over the medium-term.

Stronger post-crisis credit profiles, including few energy or commodity-related credits, remain buffeted by generally ample liquidity positions and increasingly long-dated "covenant-lite" maturity profiles inherent to a market concentrated in recent 2014 and 2015 vintage transactions. Currently, higher leverage is adequately offset by large equity cushions implied by post-crisis high enterprise valuation (EV) multiples and comfortable debt-service metrics from record low coupons, principally from low-benchmark policy rates, and an increase in non-amortising bullet-maturities.

Credit performance also supports the benign outlook for defaults. Even though higher leverage and back-ended structures have contributed to an increase in credits rated 'B-*' and below, toward approximately 50% of the 440 credits in the Fitch portfolio, through LTM August 2015 upgrades outpaced downgrades in this cohort. In addition, the share of "at-risk" issuers - those rated 'B-*' with a Negative Outlook or below, which could be considered the default pipeline - continues to decrease and reached a new post-crisis low of 12.7% as of end-August 2015.

Though the short-to medium-term outlook remains benign, the deterioration in underwriting standards since 2013 and the clear trend towards higher debt multiples, weaker structures and a rise in more marginal credits from untested sectors indicate greater medium-to-long term risk. With demand for loans exceeding supply, the loan market continues to increasingly rely on favourable credit market conditions well into the future rather than internally generated cash flow to resolve principal debt repayment. While largely immune from recent public market volatility, if credits do not exhibit adequate de-leveraging they will be vulnerable to a tightening of credit market liquidity conditions when debt maturities fall due.

In line with rising senior debt multiples and more aggressive operating profit growth assumptions from credits in untested sectors, the median Fitch expectation for senior debt recovery upon default has reduced to 65% from 70% a year earlier.

Fitch's latest European Leveraged Loan Chart book includes new data on primary market trends, credit performance as well as recent trends in default and recovery rates. The data and analysis is based on Fitch's portfolio of private credit opinions, private ratings and public ratings on about 440 European leveraged credits (as of August 2015), primarily LBOs, representing about EUR380bn of committed senior and junior loan debt.

Contact:

Deborah Ogawa
Senior Director
+44 20 3530 1743
Fitch Ratings Limited
30 North Colonnade
London E14 5GN

Paul-Antoine Conti
Director
+44 20 3530 1292

Edward Eyerman
Managing Director
+44 20 3530 1359

Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com.

Additional information is available on www.fitchratings.com.

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