THE boilermaker Baxi has become the latest highly-leveraged private-equity investment to come under severe strain as the credit crunch spreads to the wider economy.

The company, which is owned by BC Partners, has seen profits wiped out in the first quarter of this year and debts mount up.

Baxi’s latest financial figures show the extent of its problems and have resulted in Standard & Poor’s (S&P) further downgrading the company’s credit rating from B to B-, due to “weak credit protection measures and further weakening business conditions”.

The Brating puts Baxi six notches below investment-grade status and well into junk territory.

The news will come as a severe blow to BC Partners which bought Baxi for £662.5m in 2004.

The Derby-based company - known for its Potterton, Valor and Homeflame brands - employs 5,400 people across Europe and more than 2,000 in the UK. Last year, BC had to inject £40m into the company to avoid breaching banking covenants on its £587m debt.

Baxi’s most recent accounts reveal that the company plunged to an operating loss of £8.3m for the first quarter this year, and a total loss of £27.5m.

This compares with an operating profit of £19m for 2007, which had fallen significantly from £59m in 2006. Baxi’s total debt position also increased from £637m in 2007 to £650m by the end of March this year.

The company attributed the increase to rolled-up interest and the higher costs associated with loans denominated in euros, which increased as the pound weakened in value against the currency.

S&P described the outlook for Baxi as negative and said it would be monitoring the company closely because of its “fragile position”.

The agency also said that the ratings “reflect a narrow product focus, exposure to highly competitive and fragmented markets, and a weakened market share in its key UK market”.

S&P also warned that a further downgrade could follow “if Baxi’s liquidity position and prospects further deteriorate” or “if headroom on covenants significantly reduces”.

Baxi is one of a number of private equity-owned companies expected to struggle this year with high debt levels as the economy worsens and business conditions deteriorate.

The situation at Baxi is likely to disappoint former owner Philip Baxendale who gave the firm to its employees in 1983.

Baxendale came from the fourth generation of the founding family, which started the firm in 1866.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive