Prior to the virus outbreak, leverage ratios, or debt-to-Ebitda, on these credits was already high for their ratings, Fitch said after screening a total of 454 issuers.

Many issuers with plans to deleverage, either through operating cash flow growth or other management initiatives, are now expected to struggle to do so due to the crisis and debt load sustainability will be a key issue.

?I think the sudden and severe nature of the crisis exposed some degree of over-optimisation and fragility inherent in leveraged strategies,? said Edward Eyerman, head of leveraged finance at Fitch Ratings.

?The debt is fixed while the cash flows can come to a sudden stop. The immediate concern is available cash to meet near term interest and payables.?

Leveraged credits in recent years have increasingly overestimated benefits from acquisitions by making assumptions of cost savings via synergies and staff cuts, and generous Ebitda adjustments in a bid to maximise the leverage, investors said.

Leverage levels have been increasing and after taking out the unrealistic assumptions, could haunt the market in a crisis.

Fitch said credits with low leverage headroom are more likely to face a negative rating action and around 42 credits, or 9%, that are also in a sector with high virus exposure will be under even more acute pressure.

EARLIER THAN EXPECTED

Any downgrades could come earlier than expected, with lockdown measures bringing most economic activities to a halt.

S&P downgraded Cineworld?s credit and issue ratings last month to B from BB- after Britain's biggest cinema operator announced a temporary closure of its theatres, while Fitch also placed the credit on rating watch negative.

?Normally credit agencies tend to make a rating change after a financial result, but they are now more proactive on downgrade rather than reactive to it,? said an investor.

S&P has so far has made 65 rating actions in Europe's speculative-grade market related to the fallout from the coronavirus. The actions included downgrades, outlook revisions and putting issuers on credit negative watch.

While downgrades are expected to continue to hit the market, particularly after the release of first quarter results in the coming weeks, the secondary market has already largely priced in such expectation, investors said.

?Everyone knows which names will get hit,? the investor said. ?You won?t be in a situation that you could trade out before everybody else.?

The average prices of European leveraged loans in the secondary market fell to under 80% of face value -- lows not seen since 2009 -- before bouncing back to 85.69 on March 31, according to Refinitiv LPC data.

The widely-held credit for Finland-based Amer Sports fell slightly from 70.33 to 68.6 on Wednesday after Moody?s downgraded the sporting goods company?s rating on Tuesday by two notches to B3 with a negative outlook on a potential profit decline triggered by the virus. The credit saw its lowest level at 67 last week.

?Some cyclical businesses and virus-exposed sectors have already been beaten up quite badly, an expected downgrade is unlikely to make another massive fall,? said another investor.

(Editing by Christopher Mangham)

By Prudence Ho