The recent wave of large leveraged buyouts in Europe is putting strains on credit markets and prompting concern that participants may be planting the seeds of their downfall. Leverage for LBOs larger than E500 million ($605 million) has climbed to 5.9X EBITDA compared to 4.7X in the U.S, according to data from Standard & Poor's.

"Europe is just going a little further out on the limb," said a partner at a well-known buyout shop. "The question is when the hell does the liquidity dry up and why? That's what everybody is trying to guess."

In recent weeks, buyout shops have announced plans to take over Dutch media giant VNU NV for E7.3 billion ($8.9 billion) and are still working on taking private Denmark's TDC A/S for $15.6 billion. And it isn't just private equity firms launching larger deals, noted Paul Watters, a director on S&P's leveraged finance team in London. Ineos, the British chemical company, reportedly plans on issuing E3.1 billion ($3.8 billion) in bonds to finance its acquisition of Innovene

, the largest high-yield deal in Europe.

"The credit metrics and quality are more stressed than anything we've seen before in Europe," said Watters. In a recent report, he wrote that of the leveraged loans rated in 2005, some 75% were labeled in the single B range compared to only 16% in 2003.

"The LBO moved the entire capital structure a level down, compared to a few years ago," said the buyout executive.

And as deals get larger, sponsors are committing less of their own capital. Total equity as a percentage of deals has dropped to 31% after constantly hovering above 35% for the past five years, according to S&P. They've also picked up the recent trend in the U.S. of taking out dividends through recapitalizations. A record E11.4 billion ($13.8 billion) was withdrawn in the first nine months of 2005. But so long as debt gets syndicated, the deals can continue, Watters said.

The counter argument is that buyout shops can push the limits in Europe because governments, more inclined than the U.S. to step in to protect banks and jobs, limit the risk. Senior debt is often held by banks in Europe, and if banks are in trouble, the expectation is that governments will step in. "There's no tradition of blowing companies up when things go wrong," the buyout director said.