The amount of free cash held by European speculative grade-rated companies to cover debt repayments dropped in the first quarter from levels that were “thin” last year, raising the prospect of higher defaults among those junk-rated companies acquired by buyout groups.

Analysts at rating agency Standard & Poor’s said the ratio of companies' average earnings before interest, tax, depreciation and amortisation to their cash interest fell to 2.2 times in Europe in the three months to the end of March, down from a record low of 2.5 times last year and 4 times in 2003.