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Financial stress increasing among indebted companies, claims Demica

Financial stress is increasing among more indebted companies and leading to a consequent fall in profits, according to research by Demica, the UK based consultant.

Financial stress has increased for all rated companies in Europe though the increase has been negligible for A-rated companies (3%), substantial for B-rated companies (36%), and severe for sub-investment grade companies (49%). Aside from underlining the urgency for sub-investment grade companies to reduce their weighted average cost of capital, this also has an economic importance: further company failure, according to Demica, could dent the confidence of continental Europe's economic recovery.

The recent upsurge of interest in LBOs (leveraged buy-outs) in Europe has created a community of corporations which are under particular financial pressure. For these companies, usually with a low credit rating because of their substantial debt burden, lower cost financing alternatives are imperative. As a result, says Demica, securitization of corporate assets, which enables better-rated asset-backed finance to be raised from the capital markets, has come onto the radar for most financial managers in this group.

Declan Lynch, Executive Vice President, Demica, comments: "Sub-investment grade corporations across Europe are being hit hard by the high cost of servicing current debt commitments.

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