EUROPE MAY be enjoying a welcome flush of optimism as talks on Greece’s debt restructuring progress and the European Central Bank’s almost €500 billion of cheap bank loans buoys markets, but many of the continent’s companies are still facing an uncertain future.

The recent insolvency of Petroplus, a Switzerland-based refiner, could signal the beginning of the end of what has been dubbed Europe’s “phoney war of forbearance” – banks quietly extending the loans of struggling companies – with potentially troubling implications for many other companies.

While most companies default after they fail to raise the money to make loan or bond repayments, Petroplus was forced into insolvency after its banks in late December abruptly severed a credit line vital to its operations.

Many bankers say Petroplus is merely an isolated case of a weak company in a struggling industry. Yet the refiner’s woes could also indicate that lenders are becoming less amenable to simply extending company loans when they hit a sticky patch, and may augur a surge in corporate failures.

Standard Poor’s earlier this month predicted “an end to the phoney war of forbearance”, and raised its non-investment grade corporate default forecast to 6.1 per cent for 2012, or 8.4 per cent in its downside scenario.

Many of Europe’s larger companies are in rude health, and sit on robust cash piles. Even smaller or indebted companies have been able to take advantage of the high yield bond market’s renaissance by issuing billions of euro of debts this year.

However, many lower-rated companies still face pressures from Europe’s woeful economic growth and looming debt repayments.

An ECB survey published last week showed that a balance of banks tightened credit standards for a second consecutive quarter in the last three months of 2011, to readings last seen in April 2009.

Opinions still differ on how many firms will default this year.

Many bankers say European lenders are still loath to cut otherwise healthy companies adrift purely because of debt repayments. – (Copyright The Financial Times Limited 2012)