S&P warns on debt-laden companies

Economic growth, Financial Events, Leverage

Ratings agencies Moody’s and S&P started taking a heavy line with Sabic in December over the supposed decline in the business environment at Sabic Innovative Plastics (the former GE Plastics business). This caused me to speculate that they were preparing the ground for a more wide-ranging move.

Today’s S&P report on private equity owned companies confirms my suspicions. S&P has looked at 36 European buyouts, including some major chemical names. It compares 2007 performance with the forecasts made when the deals were being done over the past 18 months.

S&P’s conclusion are worrying. Firstly, they report that the median company missed its first year forecast for EBITDA by 5%. And if this wasn’t bad enough (given that the period was a boom time in terms of margins and earnings), they add that net debt targets at many companies were only met by squeezing capex and working capital. And they add that 20% of the companies surveyed would breach loan covenants if their EBITDA fell by 10% or less.

The Lex column in the Financial Times sums up the report, with admirable restraint, by commenting that ‘if the corporate profit cycle turns, as seems inevitable, inappropriate capital structures will leave many buyouts in big trouble’. S&P’s report suggests that worried CFOs now have to wonder whether the risk of continuing to supply such companies on open book terms is one they should be taking.

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