OREANDA-NEWS. February 10, 2016. Fitch Ratings says in its latest "European Leveraged Loan Chart Book" that the credit quality of European leveraged loan borrowers in its portfolio remains weak, with 50% of credit opinions at 'b-*' and below. However, Fitch expects default rates to remain low in Europe in 2016 - around 2% - despite rising leverage, more covenant-lite loan structures and an uncertain growth environment.

A large majority of European leveraged loan borrowers are from post-2012 vintages, and so benefit from strong credit selection, long-dated and non-amortising maturity profiles and generally sound liquidity positions, all of which support low default rates in the near term. The European leveraged loan segment also benefits from a more favourable industry mix than in the US, with less than 2% exposure to commodity and oil and gas credits in Fitch's portfolio.

Low oil and commodity prices should support margin and top-line revenue outlooks for consumer-oriented borrowers. Likewise, the operating margins of many issuers in energy-intensive sectors such as industrial and manufacturing could improve despite some company-specific hedging policies or sector challenges.

The cohort of 'at-risk' borrowers that carry 'b-*' credit opinions with a Negative Outlook and below has consequently reduced to 12.5% of the overall portfolio, its lowest level since the 2008-2009 crisis.

However, over the longer term risks will develop, as borrowers that have benefited from weaker underwriting standards since 2013 may face high refinancing risk when maturities approach due to limited cash flow-based deleveraging. Fitch's recovery expectations for senior lenders to future distressed credits will remain constrained by rising senior leverage, which has returned to its 2007 level. In addition, there is less loss-absorbing junior capital in 2013-2015 vintage deals.

Fitch does not expect significant outperformance from fundamental earnings and cash-flow growth to lead to a large number of rating upgrades in 2016. Lacklustre revenue growth and limited profit expansion prospects in many sectors mean future improvements in credit profiles will most likely result from specific de-leveraging events such as equity listings and M&A.

Fitch's latest "European Leveraged Loan Chart Book" is available on www.fitchratings.com or by clicking the link above. It includes updated data on primary market trends, loan performance, median credit statistics for different cohorts of issuers, and recent trends in default and recovery rates. In this edition, Fitch has also introduced statistics on issuance, covenant structures and actual financial performance for certain sectors. The data and analysis is based on Fitch's portfolio of private credit opinions, private ratings and public ratings on about 420 European leveraged credits (as of December 2015), primarily LBOs, representing about EUR360bn of committed senior and junior loan debt.