Liquidity at lower-rated European companies, many of which are owned by private equity, is worsening, Moody’s has warned, as the coronavirus crisis deepens and its impact spreads into previously resilient sectors.
More than a third of businesses in the region are now rated B3-and-below compared with 28% at the end of 2019 and 23% in 2018, because of the economic impact of the pandemic on companies’ bonds, research by the ratings agency showed.
B3 is the sixth rung of noninvestment grade credit, assigned to those that are considered speculative and subject to high credit risk.
“The credit quality of Europe’s speculative-grade companies continues to deteriorate with the pressure now broadening to companies not directly affected by the virus and lockdown policies, said Jeanine Arnold, associate managing director at Moody’s.
More than 64% of the companies rated B3-and-below in April were private equity-owned, down from 71.9% at the end of 2019. However, while there is a decrease in the proportion of such companies that are private equity-owned, the absolute number of businesses backed by buyout groups rated B3-and-below has increased, Arnold said.
Health care, manufacturing and chemicals, which had been sheltered from the turmoil created by the pandemic, are now more exposed, joining retailers, airlines, automobile makers, consumer and leisure as uncertainty about economic prospects has risen, the report found.
Since March, Moody’s
has taken negative rating actions on just under 40% of all the European speculative-grade issuers it rates. The agency now has an “unusually large number” of issuer ratings — around 50% as of 30 April compared with 27% as of 31 December 2019 — either on review for downgrade or with a negative outlook.
Years of low interest rates encouraged buyout groups to leverage up their holdings to fund dividends or bolt-on acquisitions. Several companies that have suffered rating cuts, or are on review for downgrades, are private equity-owned and are struggling to service their debt as cash flows are squeezed amid the deepening economic crisis.
These include manufacturing company Bright Bidco — majority owned by Apollo Global Management — whose rating was cut from to Caa3 from Caa1, and Blackstone-
backed engine component manufacturer and repair business MB Aerospace, which was downgraded to Caa2.
Government-backed loans are only partially helping companies address worsening liquidity issues, Arnold said.
The U.K. government, for example, has launched two programs to help businesses suffering amid the crisis: The Coronavirus Business Interruption Loan Scheme — aimed at small businesses with turnover up to £45m — and the Coronavirus Large Business Interruption Loan Scheme, for businesses with more than £45m in turnover.
But private equity-backed companies have struggled to access these programs. “Government support through state-backed loans has materialized for higher-rated companies within speculative grade, but remains uncertain for those with weak financial structures or under private-equity ownership,” the Moody’s report noted.
The ratings agency highlighted Apcoa, owned by US-based Centerbridge, which initially applied for government loans but, after lenders requested that this be super senior to existing debt, turned to term loan financing and an injection of equity.