The financial health of the large number of US leveraged buy-outs is deteriorating more than other parts of the debt market as the economy slows and the credit markets remain shut to debt-laden companies, Fitch Ratings says in a study to be released on Thursday.

Weak performance is already hurting loan-financed LBOs done in the boom years of 2004 to 2007, when investors from hedge funds to structured finance vehicles flocked to higher-yielding parts of the debt markets.

Of the 209 LBOs and nearly $300bn in accompanying loans that Fitch studied, credit rating downgrades have surpassed upgrades by a ratio of three to one from the time of the LBO until the end of May.

Fitch said that an analysis of ratings changes for companies in the high-yield market, which were not part of LBOs showed an almost equal amount of upgrades versus downgrades.

“The vast majority of the downgrades were driven by weak cash flows and weak revenue generation, things that in the context of their post-LBO capital structure could prove problematic,” says William May, senior director at Fitch Ratings.

About one-quarter of the LBOs studied by Fitch were for companies heavily tied to consumer spending, which has suffered as gas prices skyrocket and house prices plunge. Reflecting the deterioration in the economy and credit markets, downgrades and defaults for LBO-financed deals have picked up this year.

With default rates low and the economy strong in the past few years, leverage levels on LBOs rose while the traditional covenant protection demanded by lenders fell away. In 2006 and 2007, respectively, $7bn and $44bn of these so-called covenant lite LBO-related loans were issued, Fitch says.

This could mean companies could operate for a longer time in distress without defaulting on a loan because a covenant may not be there to violate, Fitch says. “A downside risk of that is that when they did default they could be in a weaker financial position,” says Mr May.