(Corrects in paragraph six to OCC regulated banks.)
By Lynn Adler
NEW YORK, July 1 Scrutiny by U.S. regulators is
reshaping the leveraged loan market as bankers complain that the
Office of the Comptroller of the Currency enforces leveraged
lending guidance more stringently than the Federal Reserve.
U.S. commercial banks, which are under tougher OCC scrutiny,
have slipped in the underwriting ranks in the second quarter
versus a year earlier whereas investment and foreign banks,
regulated by a seemingly more lenient Federal Reserve, have
climbed in the standings.
Thomson Reuters LPC's second-quarter U.S. leveraged loan
league tables compared with the same quarter a year ago show the
uneven playing field that industry players said would result
from a disparity in enforcement of federal leveraged lending
guidelines, which are meant to tame systemic risk.
Credit Suisse, Barclays and Deutsche Bank took the top three
loan underwriting positions, respectively, for large U.S.
corporate leveraged buyout deals in the second quarter, LPC data
shows. In the same quarter last year, Credit Suisse was fifth,
Barclays was fourth and Deutsche Bank was sixth.
"This year the European banks are at the top of the league
tables because the Fed is more generous than the OCC," a senior
banker at a U.S. bank said. "There is a dislocation as a result
of the uneven application of the framework. The OCC is brutal."
OCC-regulated U.S. banks - J.P. Morgan, Wells Fargo and
Citibank - were the top three underwriters of U.S. leveraged
loans in the second quarter of last year, but slipped to fourth
place, 11th place and 10th place, respectively, in the same
quarter this year.
"You've seen a real difference in the way the enforcement of
the leveraged lending guidance is being handled," said Jeremy
Swan, principal in the private equity industry practice at
accounting and advisory firm CohnReznick.
Banks regulated by the OCC are having to lend more
conservatively or walk away from deals.
"Under the OCC umbrella, the enforcement is much more
aggressive than under the Fed umbrella, and those banks are
being much more wary. The Fed has not really moved into
enforcement execution mode," Swan said.
Credit Suisse, Barclays and Deutsche Bank each declined to
Credit Suisse did hold first place for the first nine
months of last year overall before the guidance enforcement
kicked up a notch. Citi, though, was in third place in that
period and has fallen to 12th place in the first half of this
year, LPC data show. Fed-regulated Barclays and Credit Suisse
hold the top two spots in the first half of this year, with
OCC-regulated J.P. Morgan in third.
All of the banks are in the midst of an annual Shared
National Credit (SNC) review of their loan portfolios by the
OCC, the Fed and the Federal Deposit Insurance Corp.
This year's findings are keenly awaited by lenders seeking
more detail on exceptions to the guidelines that cover what
banks underwrite and hold as well as distribute.
The OCC declined to comment, and the Fed was unavailable for
immediate comment on their enforcement of leveraged lending
A senior Fed official in May warned banks that the central
bank may have to take "stronger supervisory action" to ensure
compliance with the guidance, a sign that the Fed wants to
dispel the notion that it is lenient.
There has been no let-up in highly leveraged loans that
could breach the regulatory guidelines, which require banks to
hold more reserves and possibly pay fines for some of the
The 25 large U.S. leveraged loans backing private equity
buyouts with debt of more than $500 million, according to
second-quarter LPC data, nearly doubled the 13 done in the first
Large second quarter deals include a $600 million loan to
back the acquisition of reservation technology firm TravelClick
by private equity firm Thoma Bravo and an $845 million buyout
loan to back Warburg Pincus' buyout of payment
technology provider Electronic Funds Source.
Leverage levels on two-thirds of those large buyouts were
also higher than the six times debt to earnings that regulators
categorize as "criticized" assets that could spark penalties.
Debt-to-Ebitda averaged 6.39 times on large second-quarter
deals, LPC data shows, up from 6.24 times in the first quarter.
Leverage ratios are also climbing toward this decade's peak
of 6.47 times, which was set in last year's fourth quarter and
was the highest since a pre-recession 7.05 times in 2007.
Despite the guidelines, the easy access to capital enjoyed
by 'junk' rated non-investment grade companies is unlikely to
soon change, bankers and analysts agree.
Banks are considering the fee-earning potential and
relationships with private equity firms and companies being
bought when determining which highly leveraged transactions to
challenge the regulators on, bankers note.
"If the big banks walk away from more and more highly
leveraged deals, it will certainly hit their fees, and this is a
very significant source of fee revenue for the banks. The OCC
really just started cracking down, and SNC reviews are still
under way," said Swan.
If highly regulated lenders are forced to withdraw further
by regulators, plenty of other unregulated lenders are eager to
fill the gaps, analysts and lenders said.
Big underwriting banks are facing stiff competition from
Business Development Companies including BlackRock Kelso and
Golub Capital, which are now lending more across the capital
"There's so much capital out there needing to be put to
work, but it's really a transition of the risk from regulated to
non-regulated institutions," Swan said.
(Editing By Tessa Walsh and Jon Methven)