By Ainsley Thomson, Michael Wilson and Carol Dean
LONDON -- European companies, already in the middle of an economic downturn, face another uphill struggle as they seek to refinance $242.6 billion of maturing debt over the coming year, according to credit-ratings firm Standard & Poor's.
With credit still scarce and expensive, Europe's large corporate-debt pile poses an unwelcome challenge to companies, which are having to pay dearly to roll over existing debt and insure against default risk, S&P said in a report published Tuesday.
"Funding pressures in Europe have escalated sharply since September as stress in the global financial system accelerated," the report said.
According to the report, European companies will be forced to pay back or refinance $586.3 billion through 2011, with more than 40% of that debt coming due over the next year.
Many companies are resorting to stop-gap measures such as negotiating the extension of maturities on existing loans, also at hefty mark-ups. Even healthy companies are feeling the added pressure on their books as revenue and cash flow shrink.
The few corporate borrowers able to access medium-term funding in the bond market in recent months have had to sweeten their deals with considerable risk premiums to attract investors, driving up the interest rates they have to pay.
France Telecom had to double the spread over the risk-free mid-swaps benchmark rate when it added a €300 million ($382.2 million) to its existing €1.25 billion 10-year bonds on Nov. 4. The new spread was 2.4 percentage points, from 1.1 points in May, according to the terms of the deal.
No company rated below single-A has managed to access the bond market in recent months, offering little hope for companies further down the ratings scale.
The cost of insuring €10 million of corporate debt against default for five years was €135,000 per year on Monday, up from €23,000 at the beginning of 2007.
Telecommunications is the sector with the largest needs, with $113 billion to refinance by 2011, the S&P report said. That is followed by utilities companies, which are set to repay $79 billion.
In a report published at the start of October, analysts at Unicredit estimated that Deutsche Telekom /zigman2/quotes/213490072/composite DT -3.10% has the biggest requirement of the telecom companies, with about €4.5 billion expiring before the end of 2009. France Telecom follows closely with €3.9 billion and Telecom Italia with €3.8 billion.
French nonfinancial corporate issuers account for the largest portion of debt to be refinanced, with 26%, followed closely by the U.K., Germany, Netherlands and Italy, which have a combined share of 79%. The report examined all debts rated by S&P including bank loans, notes and bonds.
Companies with refinancing needs are entering into discussions with lenders early to try and secure funding at reasonable costs.
U.K. betting group William Hill PLC confirms it has begun discussion with its lenders to refinance its £1 billion ($1.56 billion) of debt, even though it isn't due to pay the debt back until March 2010.
French construction materials group Compagnie de Saint-Gobain SA said last week that it has agreed with lenders to extend the maturity of its €2.125 billion loan by a year to October 2010.
Saint Gobain didn't reveal pricing details, but people familiar with the matter said it had to accept costlier terms to make the deal. The company agreed to pay 1 percentage point over the Euribor benchmark rate for interbank lending, compared with 0.2 percentage point under the existing loan terms, plus a flat fee of 0.4 percentage point, these people said.
U.K. cable TV and broadband provider Virgin Media Inc. also resorted to restructuring its debt, with its creditors agreeing last week to delay repayments on its £4.3 billion debt for three years. Virgin agreed to a one-time payoff to each lender and added as much as 1.5 percentage points to the interest rate. The changes added an estimated one-off payment of £70 million and an extra £50 million to Virgin Media's annual debt-servicing bill.