US leveraged lending was already loose

The investigative arm of the US Congress has told US regulators that the leveraged lending guidelines should be open to review. But this is nothing new — borrowers have been acting as if they are open to interpretation for some time.

  • By David Bell
  • 24 Oct 2017
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The rules were put in place in 2013, updating previous loose guidelines with clearer expectations of underwriting behaviour. 

One of the major red flags identified by regulators was the six times debt to Ebitda ratio that loan underwriters were expected not to exceed. Companies have also been expected to be able to repay half their debt in around five to seven years.

Rolling back these rules would be an invitation to trouble this late in the credit cycle. But loosening the rules is arguably nothing new.

The leveraged loan market had already been speeding up too fast, regardless of the guidelines.

Underwriters may have been sticking roughly to a six times leverage ratio limit, but when you can aggressively add back to the Ebitda figure, is that six times really an effective reflection of the risk in lending to the company?

As such, if regulators roll back the guidelines, it's unlikely to change the picture too much for loan investors.

They have already had their work cut out trying to push back on Ebitda add-backs and preventing companies adding incremental debt after the initial deal has closed.

The real impact will be on competition for underwriting business. 

The guidelines opened the door for unregulated non-bank firms, including some buy-side firms, to gain a foothold in leveraged loan underwriting. Traditional investment banks have lost out, wary of pushing too hard against the guidelines to compete in the riskier end of the market.

Without the guidelines in place, the playing field would be levelled again — or tilted back towards banks with balance sheet muscle and massive distribution capabilities.

Banks would be free to chase business in a frothy market to the limits of their risk appetite. Like the recent Treasury report on capital markets, chalk up the potential rollback of leveraged lending guidelines as another win for the sell-side in its competition with non-banks.

  • By David Bell
  • 24 Oct 2017

Bookrunners of European Leveraged Loans

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 BNP Paribas 1,659.34 6 7.12%
2 ING 1,631.78 5 7.00%
3 Goldman Sachs 1,565.51 5 6.72%
4 Deutsche Bank 1,532.98 4 6.58%
5 Citi 1,439.08 6 6.17%

Bookrunners of European HY Bonds

Rank Lead Manager Amount €m No of issues Share %
  • Last updated
  • Today
1 BNP Paribas 923.77 9 8.85%
2 Morgan Stanley 732.63 4 7.02%
3 Goldman Sachs 657.29 6 6.30%
4 Credit Suisse 577.70 7 5.53%
5 JPMorgan 572.76 6 5.49%

Bookrunners of Dollar Denominated HY Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 4,599.75 33 9.01%
2 Citi 4,085.51 32 8.01%
3 Credit Suisse 3,835.38 26 7.52%
4 Wells Fargo Securities 3,248.55 24 6.37%
5 Barclays 2,770.29 16 5.43%