NEW YORK, June 4 (IFR/TRPLC) - Wall Street banks are bracing
for a clampdown and even fines if regulators determine they have
violated guidelines aimed at stamping out reckless underwriting
on leveraged buyout debt.
US regulators are looking at deals arranged between October
2013 and March 2014, when, according to data from Thomson
Reuters Loan Pricing Corp, more than 24 buyouts had leverage
above the official six-times limit.
Another 19 buyouts since March have also breached that
limit, which was set by the Office of the Comptroller of the
Currency (OCC), the FDIC and the Federal Reserve as the absolute
maximum acceptable level.
While the review is routine - an annual exercise dubbed the
Shared National Credit (SNC) - banks fear regulators will be
keen to make examples of any institutions flouting the new
guidelines, which were set in place in March last year.
For list of buyouts click on:
"Banks were soundly warned in the last review that if they
could not show that they were sticking to the guidelines, that
they would be punished," said Paul Forrester, a partner at Mayer
He and others believe that, in addition to the six times
leverage ceiling, regulators will also scrutinise how many loans
breaching the limit will be permissible on each bank's books.
"The OCC has signaled that rare is closer to never, and we
read that as one or maybe two," one senior debt capital markets
banker told IFR, speaking on condition of anonymity.
The OCC and Fed were not immediately available to comment.
For the purposes of the review, regulators do not
distinguish between left-lead arrangers and bookrunners, but
market participants, including lawyers and bankers, believe the
leading banks will bear the closest scrutiny - and the
In any case, according to the TRLPC data, almost all of the
major banks have been left-lead on at least four loans in excess
of the six-times limit since October 2013.
Although banks are normally wary of such deals, they make
exceptions when buyout companies have exceptionally strong cash
flows that enable them to pay down debt more easily - something
that is also factored into the guidelines.
Richard Farley, a leveraged finance partner in law firm Paul
Hastings, said it was difficult to determine which banks are in
violation of the guidelines, based on publicly available data.
"Banks can underwrite all the deals they like over six-times
leverage as long as they can show that at least half of the
total debt, or all of the secured debt, can be paid down in (up
to) seven years," Farley said.
And that, many believe, is where banks may be able to
convince regulators that they are abiding by the spirit, if not
the letter, of the post-crisis regulatory regime.
"For any deal underwritten in breach of any of the
guidelines, banks will have an approval memo explaining how they
have justified underwriting that deal," said another debt
capital markets banker, who also declined to be named.
CAT AND MOUSE
Some banks complain that they are on an uneven playing
field, as different institutions are regulated by different
The OCC, for example, oversees US banks with deposits such
as Bank of America Merrill Lynch and Citi, while the Fed
monitors US bank holding companies such as Goldman Sachs and
Morgan Stanley, as well as foreign institutions like Credit
Suisse and Deutsche Bank.
Having different regulators only adds to the uncertainty for
banks, which are trying to satisfy authorities while at the same
time reaping the rewards of a booming leveraged loan and
high-yield bond market.
"Banks are in the business of making money," said Mayer
"If they make a credit judgment and the demand for deals is
there, then they are going to respond to that demand."
Even so, some have stepped away from some of their biggest
clients. Three longtime banks for private equity firm KKR
snubbed a request for a US$725m buyout loan for Brickman over
concerns it was too risky to pass muster with US regulators.
And that, according to one buy-side source, was in spite of
the firm's strong track record of leveraging up and then
reducing debt quickly.
"What we have seen is more banks dropping out of processes,
because they worry that they are off-sides with the guidelines,"
said Jason Kyrwood, leveraged finance partner at Davis Polk.
Others say banks are grappling with tactical decisions, such
as trying to guess how big the fines could be - and weighing
that up against the fees for underwriting such deals.
The final decision from regulators is not expected until
some time in summer, but banks are clearly expecting they will
have to pay at least a little bit - and possibly a lot more -
for their decisions.
"Fines have to be regarded as a much more likely scenario
this time round," Forrester said.
(Reporting by Natalie Harrison, Michelle Sierra and Lynn Adler;
Editing by Marc Carnegie, Tessa Walsh, and Jonathan Methven)