By Claire Ruckin
LONDON (Reuters) - As the deadline for the ECB’s consultation on its proposed leveraged lending guidelines draws to a close, bankers want clarity on which lenders it will cover and how it will be monitored.
The ECB unveiled draft guidelines in November that mirror existing US rules introduced in 2013 designed to reduce systemic risk and encourage banks to maintain credit standards by clamping down on risky loans.
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A public hearing is taking place on Friday prior to a response deadline of January 27, and many bankers are still unclear on some of the major defining aspects around implementation. A key question is whether the guidelines will only apply to eurozone banks or whether other banks operating in Europe such as those from the UK, Japan and the US will fall under the remit.
“Who do the guidelines really cover? How that shapes up is probably the key question,” a leveraged finance banker said.
Bankers are also unclear how formal the guidelines will be and how stringently the ECB will monitor them. In the US, regulators have people dedicated to monitoring each bank and each deal, but the ECB has nowhere near that kind of manpower.
To date, the ECB has remained vague about the application of the guidelines, leaving many bankers to act cautiously for fear that tighter controls could be introduced retrospectively.
“The ECB has so far been smart by being vague,” a syndicate head said. ”If there was a defined hard line we know we could not cross, we would find a way to cross it. Now it is just a set of guidelines which no-one knows that much about, so as a result we have to anticipate what we think would be too much.”
In the US, lending guidelines were introduced in 2013 to curb loans leveraged above six times debt to Ebitda. The guidelines, which also measure companies’ ability to repay, have succeeded in driving leverage levels lower. Average total leverage on large corporate buyout deals peaked at 7.4 times in 2007, but fell below six times after the guidelines were enforced more stringently from 2014.
The US rules allow the use of Ebitda calculated on an adjusted basis, something the ECB guidelines have so far ruled out.
By adjusting Ebitda, based on any number of factors including acquisitions and synergies, currency, future cost-saving programs and one-off costs such as restructurings, bankers are able to apply lower leverage multiples than reported Ebitda.
A debt financing totaling around €275m is set to launch backing Advent and Bain Capital’s acquisition of German payment group Concardis. Adjusted Ebitda is set to total around €55m, while actual Ebitda has been said to be as low as €34m.
“Adjusting Ebitda is totally justifiable. Some adjustments are easier to buy into than others, though,” a second syndicate head said.
If the ECB puts a stop to banks using adjusted Ebitda to calculate leverage, it could give those regulated by the US a competitive advantage if they are not also subject to the ECB rules.
In the US, the introduction of leverage restrictions helped lenders not subject to the guidelines – including Jefferies, Macquarie, Nomura, credit arms of private equity firms and business development companies – gain market share.
“Inevitably there will be a period of negotiation with the ECB but ultimately the question is how much difference will it make. The guidelines will have to be worked around otherwise there will be unintended consequences, as a deal eminently financeable might fall foul of the regulations,” the second syndicate head said.
(Editing by Christopher Mangham)