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Banking Agencies Issue New Proposed Guidance on Leveraged Lending
Practical Law Legal Update 8-518-6635 (Approx. 4 pages)
Banking Agencies Issue New Proposed Guidance on Leveraged Lending
by PLC Finance
| Published on 27 Mar 2012 • USA (National/Federal) |
The FDIC, OCC and FRB jointly issued proposed guidelines on leveraged lending, revising the agencies' leveraged finance guidelines issued in April 2001.
On March 26, 2012, the FDIC, OCC and FRB (the Agencies) jointly issued proposed guidelines on leveraged lending. The guidelines revise the Agencies leveraged finance guidelines issued in April 2001.
In the new guidelines, the Agencies note that since the issuance of the 2001 guidelines, there has been tremendous growth in both the volume of leveraged credit and the participation of non-regulated investors in leveraged finance activities. Leveraged finance is an important source of financing for private equity buyouts, which have rebounded off their lows during the 2008 financial crisis. The Agencies believe that debt agreements now commonly include features providing relatively limited lender protection, including:
- The absence of meaningful maintenance covenants.
- The inclusion of other features that can affect lenders' recourse in the event of weakened borrower performance.
In response to these changes in the market, the Agencies have refocused their new proposed guidelines to highlight these key areas:
- Establishing a sound risk management framework. The institution's management and board should identify its risk appetite for leveraged finance, establish appropriate credit limits and ensure prudent oversight and approval processes.
- Underwriting standards. The business premise for each transaction should be sound and its capital structure should be sustainable, irrespective of whether the transaction is underwritten to hold or to distribute.
- Valuation standards. These concentrate on the importance of sound methodologies in the determination and periodic revalidation of enterprise value.
- Pipeline management. This highlights the need to accurately measure exposure on a timely basis, the importance of having policies and procedures that address failed transactions and general market disruption and the need to periodically stress test the pipeline.
- Reporting and analytics. This emphasizes the need for management information systems that accurately capture key obligor characteristics and aggregate them across business lines and legal entities on a timely basis. This area also reinforces the need for periodic portfolio stress testing.
In implementing the new guidelines, the Agencies will consider the size and risk profile of an institution's leveraged portfolio relative to its assets, earnings, liquidity and capital.
Comments on the proposed guidance must be submitted to the Agencies by June 8, 2012.
For more information on secured lending transactions, see Practice Notes, Lending: Overview and Security: Overview.
For more information on financial covenants in loan agreements, see Practice Note, Loan Agreement: Financial Covenants and Standard Document, Loan Agreement: Financial Covenants.
For an overview of acquisition finance, see Practice Note, Acquisition Finance: Overview and for an overview of private equity buyouts, see Practice Note, Buyouts: Overview.