More scrutiny of Tech deals that
are done by Private Equity firms and are supported with debt. Aivars Lode
US regulators
have started to audit loan books of Wall Street banks on
a monthly basis in a major push to curb aggressive underwriting, according to
Reuters IFR Magazine and Loan Pricing Corp.
Having already
turned up the heat on banks
after rebuking Credit Suisse, regulators will now be able to dole out
punishments quickly if they deem that these guidelines have been contravened.
“Forgiveness is
easier to get than permission,” said Richard Farley, a leveraged finance partner in law
firm Paul Hastings.
“Monthly audits
mean the regulators can tell the banks to stop right there and then, and tell
them the consequences if they don’t.”
Farley said
there was a whole array of punishments the regulators could deliver.
“They could
change the CAMELS rating of a bank, which measures its compliance and risk
management and determines whether it is safe and solvent and could impact a
bank’s cost of capital if lowered,” he said.
“They could also
get tougher on approving bank’s capital plans and their ability to pay dividends,
as well as fines. They could even revoke a bank’s Charter and remove their
membership of the Fed,” said Farley.
Until very
recently, the Federal Reserve, the Federal Deposit Insurance Corp and the
Office of the Comptroller of the Currency (OCC) have monitored banks’ behavior
annually in Shared National Credit (SNC) reviews that take place over the
summer.
The focus of the
audits will be on whether banks are adhering to guidelines, spelled out in
March 2013, which say that a loan can be criticized or considered “non-pass” if
a company cannot amortize or repay all senior debt from free cash flow, or half
of its total debt, in five to seven years.
Leverage over
six times is also seen as problematic.
The Fed, the
FDIC and the OCC were not immediately available for comment.
Tightening The
Screws
Bankers, who
have complained for months about an uneven playing field between banks watched
by the OCC and the Fed, welcomed the news.
“All the banks
want is a level playing field and more consistent feedback about what doesn’t
fit inside the box. There’s still too much left for interpretation at the
moment,” said one market source.
“This means
banks will not have to wait another year for feedback following the SNC review.
There is a lot more ongoing feedback and the regulators in general are just
being more active…and giving guidance that is more specific.”
Two market
sources said the regulatory audits were monthly.
“Regulators are
asking dealers to provide them with monthly reports of things that have closed
during that month,” said one.
“They are
looking at the deals that have closed, relevant credit metrics and
amortizations. Rather than relying on third party information providers,
regulators are gathering the information themselves.”
The audits are
understood to be more broad based, and go beyond just looking at loans that
banks have made, in order to get a better understanding of how each lender
views different credits and how their business operates as a whole.
Another market
source emphasized how regulators are already embedded in banks, by drawing
comparisons to the overhaul of asset-backed security lending after the
financial crisis. The focus now, he said, had just shifted to leverage lending.
“The audits look
at the deals the banks have turned down, look at how the banks rate and
classify each loan, and the process they go through to approve the credit. It’s
about looking at the deals banks decide to do as well as those they don’t,”
said the first source.
Unregulated
Territory
There is no
doubt, however, that banks still have different interpretations of what the
guidelines mean and which deals to push on.
Credit Suisse
has been seen as the worst offender but JP Morgan caused a stir last week when
it teamed up with unregulated lenders to underwrite a highly leveraged
financing backing the $4.3 billion acquisition of business software maker
Tibco.
Market sources
said that the deal could contravene regulatory guidelines, as the leverage is well in excess of eight times.
Another source,
however, said that JP Morgan must have been in close dialog with regulators
before signing up for the deal.
Two other
private equity firms have also stepped up to underwrite the Tibco buyout. Two
market sources named Apollo as an underwriter on the deal, and a third
named Merchant Capital Solutions, a capital markets
business created by the Canada Pension Plan Investment Board, KKR
and Stone Point Capital.
Apollo and KKR
declined to comment.
Some people said
that dynamic could become more common as regulatory moves shift risk away from
banks into the shadow banking sector.
“If banks are living
in fear of regulators constantly, this could accelerate shadow banking stepping
in to take their place,” said Farley.
Reporting by
Natalie Harrison and Michelle Sierra of Reuters IFR Magazine and Loan Pricing
Corp.
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