Financial Regulatory Forum

Private equity: bank regulators tighten the collar on leveraged loans

By Alex Lee

NEW YORK, May 11 (Business Law Currents) – With the leveraged finance market coming back to life, bank regulators want financial institutions to seriously tighten oversight and maintenance of their leveraged portfolios. Leveraged loans are heavily utilized by private equity shops for their transactional activities but there is an ever-increasing concern that while loan volume has gone up, underwriting practices have deteriorated to unacceptable standards.

On March 26, 2012, bank regulators released proposed guidance on leveraged lending for public comment. The Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency have proposed revising previous guidance issued in 2001 on leveraged finance as greater scrutiny is being placed on financial institution based risk factors. Proposals in this sector could potentially impact private equity shops by affecting one of their primary sources of funding for acquisition deals. (more…)

Links to CDS measures growing common in bank credit deals (Westlaw Business)

The American International Group (AIG) building is seen in New York, March 24, 2009. REUTERS/Shannon StapletonBy Erik Krusch

Jan. 10 (Westlaw Business) –  Credit terms are loosening, but lenders are still after their proverbial pound of flesh. Consider AIG and AT&T’s recent credit agreements, which link each loan’s interest rate to the corporations’ credit default swaps (CDS). Lenders are also insulating themselves from risk with London Interbank Offered Rate (LIBOR) floors, such as the one undergirding healthcare technology company MedAssets’ recent term loan. In a similar vein, bankers installed an original issue discount (OID) in construction materials maker Armstrong World Industries’ recent term loan. Lenders are doing their due diligence and weighing risks in order to concoct the right mix of interest rate terms in hopes of protecting their capital going forward. (more…)

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