European corporate insolvencies to rise next year

By Elena Moya

LONDON (Reuters) - European corporate insolvencies will increase next year as companies struggle to maintain their high debt levels while interest rates rise, said the chairman of Close Brothers Corporate Finance.

"We will have more personal insolvency issues and that will lead to more corporate insolvencies," said Richard Grainger, chairman of the unit of Close Brothers Plc CBG.L, during the Reuters investment banking summit in London.

Encouraged by low interest rates over the past few years, companies -- some financed by private equity firms -- have increased their debt levels to as much as 10 times earnings before interest, tax, depreciation and amortization (EBITDA), Grainger said.

That compares with the traditional 4.5 times, he said.

"You can't have those deals and not have problems. You know someone may not make it," he said. "Your margin of error has been reduced."

The UK, Germany and France are expected to lead European restructuring activity next year, he said.

The Bank of England, which raised interest rates to 5 percent from 4.75 percent earlier this month, may increase the price of money again, he said.

"I don't think interest rates have peaked at 5 percent. There may be more corrective work going on," Grainger said.

In Germany, small and medium-sized companies are facing competition from abroad. Auto parts makers such as Schefenacker are now negotiating debt restructuring deals.

In France, companies traditionally have been unwilling to consider restructuring deals that would require them to open their books and ownership to outsiders.

As the market opens, Close Brothers is planning to expand its staff to about 50 from 43 now, Grainger said. "There's a first-one advantage issue. We're putting together a lot of resources to be the first ones."