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Very Large Banks Get Leveraged-Loan Guidance
WASHINGTON (3/22/13)--Federal bank regulators released updated supervisory guidance Thursday on leveraged lending, which they say has been increasing since 2009 after declining during the financial crisis. It is important that banks provide leveraged financing to creditworthy borrowers in a safe and sound manner, the guidance says.

The guidance is targeted to large banks. It applies to all financial institutions supervised by the Office of the Comptroller of the Currency, the Federal Reserve Board, and the Federal Deposit Insurance Corp. that engage in leveraged lending activities. The guidance does not apply to credit unions.

However, as the directive itself notes, the number of community banks with substantial involvement in leveraged lending is "small," and the agencies expect community banks to be largely unaffected by this guidance. In fact, it says, given that most leveraged lending transactions exceed $50 million, leveraged loans are held primarily by "very large or global institutions."

The regulatory guidance outlines:
  • High-level principles related to safe–and–sound leveraged lending activities, including underwriting considerations;
  • Assessing and documenting enterprise value;
  • Risk management expectations for credits awaiting distribution;
  • Stress-testing expectations;
  • Pipeline portfolio management; and
  • Risk management expectations for exposures held by the institution.
 

The regulators defined leverage loans as those that involve:

  • Loans whose proceeds used for buyouts, acquisitions, or capital distributions;
  • Transactions where the borrower's Total Debt divided by EBITDA (earnings before interest, taxes, depreciation, and amortization) or Senior Debt divided by EBITDA exceed 4.0X EBITDA or 3.0X EBITDA, respectively, or other defined levels appropriate to the industry or sector;
  • A borrower recognized in the debt markets as a highly leveraged firm, which is characterized by a high debt-to-net-worth ratio; or
  • Transactions when the borrower's post-financing leverage, as measured by its leverage ratios (for example, debt-to-assets, debt-to-net-worth, debt-to-cash flow, or other similar standards common to particular industries or sectors), significantly exceeds industry norms or historical levels.
 Use the resource link to access the bank guidance.


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