Since U.S. regulators published the Interagency Guidance on Leveraged Lending (Guidance), in March 2013, commentators have speculated on its likely market impact (the guidance is discussed in detail in an April 2013 Osler Update). Some have theorized that the Guidance – and in particular its concern over debt-to-EBITDA or leverage ratios exceeding 6.0 times – would push leveraged lending away from U.S.-regulated banks and into the hands of unregulated (or less regulated) lenders, including private funds and certain foreign banks. Others have guessed that less regulated products, such as high-yield bonds, would end up as beneficiaries.
Evidence of the mounting impact of the Guidance surfaced recently in the form of a decision by several traditional U.S.-regulated banks (citing the Guidance) to sit out the proposed US$1-billion LBO by KKR portfolio company Brickman Group Ltd. of landscaping company ValleyCrest. Moody’s estimates that this transaction would involve leverage at 6.8 times ValleyCrest’s EBITDA, above the 6.0 times indicated in the Guidance as raising concerns for borrowers in most industries. In light of the traditional U.S.-regulated banks’ decision not to participate, this transaction is instead expected to be financed by so-called alternative lenders not subject to the Guidance. These are to be led by a private U.S. brokerage, and are to include foreign banks that do not accept U.S. deposits. Particularly interesting is the fact that many of the traditional U.S.-regulated banks sitting out the proposed transaction actually financed KKR’s LBO of Brickman itself in 2013, likewise at a reported leverage ratio of 6.8 times Brickman’s EBITDA.
While the full impact of the Guidance on the U.S. leveraged lending market remains to be seen, all indications are that U.S. regulators intend to enforce the Guidance. This may present unregulated lenders, such as private funds and certain foreign banks, with an opportunity to pick up market share in the lucrative U.S. leveraged loan market.
“Banks Snub Landscaper Buyout Amid Regulatory Pressure,” Wall Street Journal, May 29, 2014.
“Banks deny KKR buyout loan amid regulatory crackdown,” Reuters, May 29, 2014.
“Leveraged Lending Guidance, Taking Direct Aim,” by Meredith Coffey, EVP Research and Analysis, LSTA, LSTA Loan Market Chronicle 2014, at pages 110-111.