Fitch Examines Probability Of European Loan Recoveries

While U.S. bankers and institutional investors are increasingly ogling Europe's growing leveraged loan market, some market players have conceded that the lack of insolvency legislation enabling them to gauge recovery rates could pose a setback to the region's development.

To date, there has been only limited information on the issue. But last week, Fitch IBCA Inc. released a report comparing insolvency legislation in Germany, the U.K. and France - the three European countries with the greatest number of leveraged loans.

Even though the report dwells on the loan market, it has implications for high yield buyers on two levels. First, there are a number of cross-over buyers that are interested in leveraged loans and high yield. And maybe more importantly, there are tips that can be gleaned for high yield buyers if they view the report from a slightly unorthodox angle, according to a Fitch spokesman.

For the countries that are particularly lucrative to senior secured lenders (i.e. banks) in a bankruptcy proceeding, then the lower credit investors, such as the high yield buyers, will have a harder time getting their money back, the spokesman said.

Based upon an analysis of these loans, the rating agency has come up with a loan rating standard that it believes will enable investors in the European market to have a clearer understanding of the risks involved with leveraged loans from the region.

Of the four European countries cited in the report, France has the least favorable jurisdiction for secured loan and bond creditors, according to Fitch, due to the fact that a secured creditor doesn't necessarily have priority above other groups of creditors in either the timing of the payment or distribution of realizations.

Conversely, Fitch said the U.K. has the most pro-creditor jurisdiction, a view supported by loan pros. A creditor there can take security over all a company's assets, both current and future, via fixed and floating charges.

Standing between the U.S. and the U.K. is Germany, which recently adopted new regulation designed to include some of the debtor-friendly aspects found in the U.S., without significantly disadvantaging secured creditors.

Unlike the U.S. market, where it is well established that the recovery rate for leveraged loans is about 80%, recovery rates in Europe are difficult to estimate. This is largely because of the absence of pan-European insolvency legislation, said Faith Bartlett, author of the report and the director of loan products at Fitch IBCA.

Not even the advent of the euro, about to go into its second year of existence, is likely to engender a single set of rules in the near term, she said.

"It's a nice idea," she said, "but ... we still have different governments [in Europe]."