By Jonathan Schwarzberg and Davide Scigliuzzo
NEW YORK (LPC/IFR) – U.S. regulators said they are open to revising restrictions on leveraged lending, offering an olive branch to a GOP-controlled Congress keen to roll back banking regulations.
The three main U.S. bank regulatory agencies, in recent letters seen by Reuters, said they could revisit the guidelines they put in place in 2013.
Critics say those guidelines have hampered business, and members of Congress started pressing for a rollback shortly after Donald Trump’s inauguration as president.
In theory, the guidelines prevent banks from loaning money when doing so would put the borrower’s leverage at six times or higher, or for companies that could not quickly pay down debt.
They were broadly intended to prevent the kind of egregious and wanton lending widely seen as contributing to the last global financial crisis.
US Senator Pat Toomey asked the Government Accountability Office – the investigative arm of Congress – if the guidelines rose to the level of formal rules.
The GAO decided in October that they do, meaning Congress has the right to amend or eliminate the guidelines – which many bankers feel have hampered growth – altogether.
But to forestall that development, the Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation said they could seek further feedback on the guidelines.
The three agencies sent their letters to Representative Blaine Luetkemeyer, head of the House Financial Services Subcommittee, who asked them to stop enforcing the guidelines.
“This is positive,” said Richard Farley, head of the leveraged finance group at law firm Kramer Levin.
“It seems both Congress and regulators are looking towards a revised guidance from the agencies to avoid the 2013 guidance being revoked and leaving the market in limbo.”
Several specialists with knowledge of the situation said the response from regulators indicated a desire to avoid a protracted battle with a Congress inclined against regulation.
Under the 1996 Congressional Review Act, Congress is entitled to review – and vote to eliminate – formal regulations issued by government agencies.
Senator Toomey asked the GAO to decide whether the leveraged lending guidelines, created after the financial crisis, rose to the level of regulations that fall under the Act.
Experts say the three agencies have decided to revisit the guidelines, rather than risk a fight on Capitol Hill that could limit the ability to issue similar guidance in future.
Two people closely following the matter said the regulators had given Congress the opportunity to declare victory, while preserving their prerogatives.
Both described the decision as a purely political one that had little to do with the actual leveraged lending restrictions.
“If Congress votes them down, then the agencies are basically barred from coming back,” said Jacques Schillaci, a banking regulation specialist at law firm Linklaters.
“If the agencies now come out with something that addresses the concerns and gives banks a bit more leeway, it gives Toomey the ability to say: we got what we wanted.”
The three agencies declined to comment. Requests for comment went unanswered by the offices of Luetkemeyer and Toomey.
Bankers have frequently complained that the guidelines do not prevent highly leveraged lending from occurring, but only keep their own regulated institutions from getting the business.
Instead, they say, lenders not subject to the guidelines, such as non-bank investment firms, get to pick up the business that they cannot touch – and the numbers suggest they are right.
According to data from LPC, two-thirds of leveraged buyouts through the first three quarters of 2017 had leverage above six times – and more than 26% topped seven times.
The last time the percentage of LBOs with seven times leverage was this high was in 2007, just before the financial crisis kicked in.
And not all of that is from institutions exempt from the guidelines: mainstream banks are still able to arrange deals well in excess of the six-times leverage threshold.
This can be done by inflating a company’s Ebitda through adjustments – which makes the leverage seem smaller – or by showing the company can generate enough cash to bring leverage down quickly thereafter.
Recent financings for Tekni-Plex and Avantor, for example, were all marketed with leverage of around or above seven times.
Whatever the methodology, the fact that the guidelines have not entirely prevented leverage topping six times suggests to some in the market that the fuss about them is overblown.
“The leveraged lending guidelines are a non-issue,” said Jay Ptashek, a leveraged finance partner at law firm Kirkland & Ellis.
“People understand the guard rails and are complying, whatever that means. Leverage is generally being maxed out within those guidelines.”
(Reporting by Jonathan Schwarzberg at LPC and Davide Scigliuzzo at IFR; Additional reporting by Patrck Rucker at Reuters; Editing by Jon Methven and Marc Carnegie)