The sharp rise in leveraged recapitalisations, described as the cocaine of private equity by one US buy-out chief, is damaging companies' credit quality and could lead to an increase in default rates, Standard & Poor's will say today.

The credit rating agency has found that default rates among a sample of companies that have undergone leveraged recaps - a refinancing method that allows private equity groups to suck out large dividend payments by loading their portfolio companies with additional debt - were as high as 6 per cent.