Funds News

OCC head says leveraged lending guidance needs no revisions

NEW YORK, May 24 (LPC) - Comptroller of the Currency Joseph Otting said Thursday that he does not expect to make changes to the federal leveraged lending guidance as he does not see revisions necessary since the guidelines currently allow for flexibility for banks.

The comments came on a conference call with reporters. In February, while speaking at the ABS Vegas conference, he put forward the idea that banks could step outside the guidelines if they have the capital to support that without threatening their financial well-being.

Otting said Thursday he understands leveraged lending guidance to, in fact, be just that, and as such banks may occasionally operate outside those parameters.

“I think it was always intended to be guidance,” Otting said.

However, he cautioned that if banks do lend outside the recommendations, then what the Office of the Comptroller of the Currency (OCC) is looking for is that the banks are doing this prudently.

“What we would look for is if they are doing it in a safe and sound manner,” Otting said. “We want to make sure they have the capital and the talent to evaluate that kind of activity and that the risk profile has been approved.”

The federal government updated its leveraged lending guidance in 2013 in an effort to curb the riskiest lending by banks. In addition to the OCC, the guidance is overseen by the Federal Reserve and the Federal Deposit Insurance Corporation.

The guidelines broadly drew a line at 6.0 times for debt-to-Ebitda with loans exceeding that standard requiring additional scrutiny from regulators. Lending above that level was allowable if all of the company’s secured debt or half of the company’s debt could be paid down within five to seven years.

Since Otting’s comment in February, leverage multiples have climbed. Leveraged buyouts during the second quarter of the year have averaged 6.57 times leverage, the highest level since 6.65 times during the third quarter of 2014 and before that 6.71 times during the fourth quarter of 2007, according to data from Thomson Reuters LPC.

The number of highly leveraged transactions underwritten by banks subject to the guidelines has also mounted. Such transactions include roofing distributor SRS Distribution‘s buyout with leverage of 7.5 times, education software provider Renaissance Learning’s buyout of 7.8 times and food manufacturer Hearthside Food Solutions’ leveraged buyout with leverage of 7.0 times.

A banker said banks have not changed their lending habits dramatically and are still considering the guidance when deciding to underwrite loans.

“I think that it’s more a change in sentiment than an actual change in policy,” the banker said.

The FDIC declined to comment. The Federal Reserve and Goldman Sachs did not immediately return a request for comment. (Reporting by Jonathan Schwarzberg Editing by Michelle Sierra and Lynn Adler)