Banks seen pulling back lending to loan buyers

Date: Wednesday, July 11, 2007
Author: Elena Moya, Reuters.co.uk

LONDON (Reuters) - Banks are pulling back from lending to hedge funds and others who invest in leveraged loans, raising the spectre of more problems syndicating debt packages behind private equity deals, restructuring specialists said.

Rising corporate debt levels of almost 10 times profits, compared with 6.5 times three years ago, according to Standard & Poor's data, will also make some companies struggle to refinance during times of trouble, they said at a Corporate Restructuring Conference in London on Wednesday.

"We're seeing a withdrawal of liquidity by prime brokers, mainly the big investment banks lending to hedge funds, and by lenders to parties willing to buy leveraged loans," said Robin Doumar, managing partner at Park Square Capital, a London-based fund with 2.25 billion euros (1.52 billion pounds) under management.

His fund focuses on mezzanine finance and distressed situations.

In the United States, several junk bond sales have been pulled or had their terms sweetened over the past few weeks to draw buyers. U.S. investors began pulling back from new issues after troubles at two Bear Stearns (BSC.N: Quote, Profile , Research) hedge funds exposed to subprime mortgages sparked worries about a broader fallout.

ServiceMaster Co. (SVM.N: Quote, Profile , Research), Catalyst Paper Corp. (CTL.TO: Quote, Profile , Research), Ahold's (AHLN.AS: Quote, Profile , Research) U.S. Foodservice and Magnum Coal Co., are some of the companies that have postponed or scrapped a deal in recent weeks.

"Europe is trailing the U.S. in recognition of what's going on," Doumar said. "There are going to be a lot of stuck deals. People need to wake up and smell the coffee."

Struggling companies have also enjoyed years of low interest rates and ample liquidity to refinance their highly indebted balance sheets, thereby avoiding insolvency. Companies such as Britain's Focus DIY and Polestar refinanced more than once.

Tougher times may be ahead, especially in Europe, where syndicated loans have debt levels of more than seven times earnings before interest, taxes, depreciation and amortization, compared with about five times in the United States, Doumar said.

Capital structures of European companies include as much as 70 percent of debt, above an average of less than 50 percent in the United States, Doumar said.

"We'll see a reduction in debt levels in Europe about one year later than in the U.S.," said Lynn Hiestand, a partner at Skadden, Arps, Slate, Meagher & Flom who coordinates the firm's European restructuring practice.