| NEW YORK, April 11
NEW YORK, April 11 Banks keep underwriting
highly leveraged loans for low-rated companies that are drawing
U.S. regulators' attention, Thomson Reuters LPC data show,
despite a looming review by the federal agencies that are trying
to clamp down on these transactions.
There has been no let-up in deals that could run afoul of
year-old regulatory hurdles, which require banks to hold more
reserves and possibly pay fines, in the weeks leading up to
reviews of their loan portfolios by the Office of the
Comptroller of the Currency, the Federal Reserve and Federal
Deposit Insurance Corp.
Bankers expect the annual Shared National Credit (SNC)
quality reviews to help clarify how regulators will treat
various leveraged loans.
Warning letters were sent to some banks last year urging
compliance with Leveraged Lending Guidance published in March
2013, which is designed to avoid the type of systemic risk
spurred by the originate-to-distribute mortgage loan market.
Bankers say that the guidelines are driving more judicious
underwriting decisions, but 13 of the largest corporate
leveraged buyout deals in the first quarter carried
debt-to-Ebitda ratios of 6.24 times, on average, the LPC data
This is above the 6.0 times leverage that regulators deem as
"criticized" assets that could spark penalties, but below 6.47
times in the fourth quarter of 2013. Leverage ratios averaged
6.21 times in full-year 2013, the highest since a pre-recession
peak of 7.05 times in 2007.
Bankers are still grappling with which highly leveraged
deals to underwrite to stay beneath regulators' radar after
receiving the warning letters in the second half of 2013.
Arranging banks say they are choosing carefully,
particularly on deals that may be criticized, and seeking more
detail on exceptions to the guidelines that cover what banks
underwrite and hold as well as distribute.
"If you ask everyone if there are deals you have been less
aggressive on, the answer is yes," one banker said. "Chances are
those are deals where we're not M&A advisers and we may not have
that great a position with the client going forward," he added.
"I don't think there's been a deal that should have gotten
done that didn't get done," the banker said. "I think it has
started to affect behavior, but the amount of deals getting done
in the market? No."
Banks are willing to do some criticized deals, but are wary
not to have too many criticized loans in their portfolios.
Decisions are often linked to fee-earning potential and
relationships with private equity firms and the companies being
As the second quarter begins, several new deals carry
leverage in the 6.0-7.5 times area. These include Checkout
Holding Corp, the borrower for marketing information provider
Catalina Marketing's buyout; GYP Holdings, holding company of
wallboard distributor Gypsum Management and Supply; and
Renaissance Learning, which provides online assessments and
data-powered teaching tools.
Bankers will soon know which tactics are optimal.
"The SNC review will get started later this spring,
regulators will review data in the late summer and the public
report is typically published in the fall," said OCC spokesman
Bryan Hubbard. The OCC declined to comment on the leverage ratio
The review gauges the credit quality of large loan
commitments owned by U.S. banks, foreign banking organizations
Insatiable investor demand for new U.S. leveraged loans is
creating aggressive market conditions, pricing and deal
structures. High purchase price multiples have boosted debt
loads and leverage ratios for corporate buyouts in the first
quarter, and that trend could continue.
"With fewer auctions and not a ton of opportunities,
sponsors are competing heavily for the deals available, which is
driving purchase price multiples higher and therefore leverage
may go up as well," said Ioana Barza, Thomson Reuters LPC's
director of analysis.
It is too early to assess the long-term impact on
underwriting, however, particularly with the review pending,
bankers and analysts agree.
"Sponsors may opt not to do deals due to high valuations and
high purchase prices and pursue refinancing to reduce borrowing
costs on existing debt or dividend recaps to take money off the
table," she said.
While bankers hash through a heap of new regulations crafted
to avert a repeat financial crisis, and to protect investors, a
hunger for extra yield keeps luring those investors to
higher-risk assets including leveraged loans.
Loan mutual funds, a measure of retail demand and exposure,
are reaching an unbroken stretch of inflows nearing two full
The pace of CLO fund issuance, a reflection of institutional
demand for the loans, is accelerating monthly this year as
regulatory uncertainties specific to CLOs are being clarified.
This has made for an ongoing borrower-friendly market for
low-rated companies taking loans with fewer investor
For now, the U.S. leveraged loan default rate is low, ending
the first quarter at 1.4 percent, down from 2.2 percent the
prior quarter and 3 percent in the first quarter a year ago,
Moody's said in a report. "We believe the default rate will stay
low as long as liquidity remains ample and distressed companies
are able to access the market."
(Editing By Jon Methven)