| NEW YORK
NEW YORK May 29 Three longtime banks for
private equity firm KKR & Co LP have snubbed a request
for a $725 million buyout loan over concerns it is too risky to
pass muster with U.S. regulators, sources familiar with the
situation said on Thursday.
The banks had funded a similar deal six months earlier.
The Federal Reserve, the Office of the Comptroller of the
Currency and the Federal Deposit Insurance Corp jointly issued
guidelines in March 2013 that require banks to cut down on
junk-rated loans that would raise the debt levels of a company
beyond certain thresholds.
Last month, regulators launched an annual examination of
banks' loan books, known as Shared National Credit reviews, and
stepped up enforcement of the guidelines. The reviews will
likely determine to what extent banks can make exceptions to the
guidelines, which have been criticized by many leveraged finance
professionals as ambiguous.
In December, Morgan Stanley, Credit Suisse Group AG
and Goldman Sachs Group Inc were among banks
that helped finance KKR's $1.6 billion leveraged buyout of
landscaping company Brickman Group Ltd. Morgan Stanley and
Credit Suisse had the lead roles in that deal.
At the time, Moody's Investors Service pegged Brickman's
leverage at 6.8 times its annual earnings before interest, tax,
depreciation and amortization (EBITDA). Under the regulatory
guidelines, leverage in excess of six times EBITDA raises
concerns for most industries.
Now, the three banks have refused to bankroll a bid by
KKR-owned Brickman to buy rival landscaping company ValleyCrest
Companies LLC, as they seek to cut back on making new loans that
do not comply with the leveraged lending guidelines, the sources
said. Dell Inc founder Michael Dell's investment firm
It is unusual for banks that lead the financing of a
leveraged buyout of a company not to be tapped for smaller
Jefferies Group LLC, a privately held brokerage whose
leveraged finance business is not overseen by the same
regulators, has stepped up to lead the financing of Brickman's
deal instead, the sources said. Jefferies had not participated
in the December deal.
The sources asked not to be identified because the
discussions are private.
KKR, Morgan Stanley, Credit Suisse, Goldman Sachs and
Jefferies declined to comment. Brickman representatives did not
respond to requests for comment.
Banks have occasionally passed on leveraged loan deals in
the past for fear of upsetting regulators. However, the decision
by three big Wall Street banks to not back one of their biggest
private equity clients highlights how regulations created after
the financial crisis are reshaping the competitive landscape in
Smaller banks and non-bank financial institutions in the
United States that are not regulated to the same extent are
stepping up to take over lucrative business as major Wall Street
firms are forced to pull back.
Leveraged loans are lucrative for banks. Last year, banks
received $1.47 billion in fees for U.S. leveraged loans, up 17
percent from 2012, according to Thomson Reuters and Freeman
The lenders that financed KKR's acquisition of Brickman in
December also included Macquarie Group Ltd, Royal Bank
of Canada, Mizuho Bank Ltd, Sumitomo Mitsui
Banking Corp, UBS AG and KKR's capital
Macquarie, Mizuho and SMBC are partipating in the
ValleyCrest deal, as is a new bank, Nomura Co Ltd, one
of the sources said. A bank meeting to market the $725 million
loan to debt investors has been scheduled for June 4.
It was not clear how some of these banks would overcome
regulatory concerns. Representatives for those organizations did
not immediately respond to requests for comment.
Some of the sources suggested projected synergies between
Brickman and ValleyCrest could reduce the company's leverage to
below six times EBITDA.
Earlier this month, a senior Fed official said in a speech
that the quality of leveraged loan deals has deteriorated this
year and warned that regulators may have to take further action
to ensure compliance with the guidelines.
(Reporting by Lauren Tara LaCapra, Greg Roumeliotis and
Michelle Sierra in New York; Editing by Paritosh Bansal and