The European distressed securities market is on the rise. A tide of M&A and private equity deals threatens to undermine credit quality. Credit rating downgrades are expected to increase among industrial companies from the low levels seen in the last two years, and are likely to outstrip upgrades. Yet with economic conditions remaining relatively benign, rating agencies believe defaults will stay low in 2006, before picking up in 2007.
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The bigger risk is the abundance of liquidity from private equity firms and hedge funds, which is expected to persist well into 2006, given recent heavy fundraising by buyout investors.
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