European cos' leverage appetite to rise: JPM

By Richard Barley

LONDON (Reuters) - European companies will come under pressure to make their balance sheets more aggressive and may become more willing to hold "junk" credit ratings, adopting some of the tactics used by private equity firms, a senior JP Morgan banker said.

"A macro trend that we see ... is that corporates in Europe will accept more aggressive balance sheets and weaker ratings," Hamish Buckland, co-head of leveraged finance at JP Morgan, said at the Reuters Hedge Funds and Private Equity Summit in London on Wednesday.

"The pressure is going to come ... from the institutional shareholders, the public equity guys, who are saying: 'Rather than sell and be taken private, let's be more aggressive and more efficient about how we manage our balance sheet, do some of the things private equity have in their toolbox,'" he said.

The change is unlikely to be swift, Buckland said, but as a result corporates are expected to take up a greater share of the leveraged loan market, which is dominated in Europe by financing for leveraged buyouts by private equity firms.

A downgrade to "junk"-status ratings can raise a company's funding costs, but the huge increase in the funding available in the leveraged debt markets in recent years means that the prospect of moving out of investment-grade territory may not be as worrying as in the past.

One area that may drive this is mergers and acquisitions, with companies willing to consider losing investment-grade status for the right deal.

Late last year, German chemicals company Lanxess (LXSG.DE: Quote, Profile, Research, Stock Buzz) made waves in the credit markets by saying it would countenance temporary double-B category ratings for an acquisition.

This week, Standard & Poor's said it might cut retailer Pinault Printemps Redoute's (PRTP.PA: Quote, Profile, Research, Stock Buzz) rating to "junk" as a result of its bid for sportswear maker Puma (PUMG.DE: Quote, Profile, Research, Stock Buzz), which is being financed entirely with bank debt.  Continued...