By Natalie Harrison, Michelle Sierra and Lynn Adler
NEW YORK, June 4 (IFR/TRPLC) - Wall Street banks are bracingfor a clampdown and even fines if regulators determine they haveviolated guidelines aimed at stamping out reckless underwritingon leveraged buyout debt.
US regulators are looking at deals arranged between October2013 and March 2014, when, according to data from ThomsonReuters Loan Pricing Corp, more than 24 buyouts had leverageabove the official six-times limit.
Another 19 buyouts since March have also breached thatlimit, which was set by the Office of the Comptroller of theCurrency (OCC), the FDIC and the Federal Reserve as the absolutemaximum acceptable level.
While the review is routine - an annual exercise dubbed theShared National Credit (SNC) - banks fear regulators will bekeen to make examples of any institutions flouting the newguidelines, which were set in place in March last year. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^For list of buyouts click on: ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
"Banks were soundly warned in the last review that if theycould not show that they were sticking to the guidelines, thatthey would be punished," said Paul Forrester, a partner at MayerBrown.
He and others believe that, in addition to the six timesleverage ceiling, regulators will also scrutinise how many loansbreaching the limit will be permissible on each bank's books.
"The OCC has signaled that rare is closer to never, and weread that as one or maybe two," one senior debt capital marketsbanker told IFR, speaking on condition of anonymity.
The OCC and Fed were not immediately available to comment.
GREY AREAS
For the purposes of the review, regulators do notdistinguish between left-lead arrangers and bookrunners, butmarket participants, including lawyers and bankers, believe theleading banks will bear the closest scrutiny - and thepunishments.
In any case, according to the TRLPC data, almost all of themajor banks have been left-lead on at least four loans in excessof the six-times limit since October 2013.
Although banks are normally wary of such deals, they makeexceptions when buyout companies have exceptionally strong cashflows that enable them to pay down debt more easily - somethingthat is also factored into the guidelines.
Richard Farley, a leveraged finance partner in law firm PaulHastings, said it was difficult to determine which banks are inviolation of the guidelines, based on publicly available data.
"Banks can underwrite all the deals they like over six-timesleverage as long as they can show that at least half of thetotal debt, or all of the secured debt, can be paid down in (upto) seven years," Farley said.
And that, many believe, is where banks may be able toconvince regulators that they are abiding by the spirit, if notthe letter, of the post-crisis regulatory regime.
"For any deal underwritten in breach of any of theguidelines, banks will have an approval memo explaining how theyhave justified underwriting that deal," said another debtcapital markets banker, who also declined to be named.
CAT AND MOUSE
Some banks complain that they are on an uneven playingfield, as different institutions are regulated by differentauthorities.
The OCC, for example, oversees US banks with deposits suchas Bank of America Merrill Lynch and Citi, while the Fedmonitors US bank holding companies such as Goldman Sachs andMorgan Stanley, as well as foreign institutions like CreditSuisse and Deutsche Bank.
Having different regulators only adds to the uncertainty forbanks, which are trying to satisfy authorities while at the sametime reaping the rewards of a booming leveraged loan andhigh-yield bond market.
"Banks are in the business of making money," said MayerBrown's Forrester.
"If they make a credit judgment and the demand for deals isthere, then they are going to respond to that demand."
Even so, some have stepped away from some of their biggestclients. Three longtime banks for private equity firm KKRsnubbed a request for a US$725m buyout loan for Brickman overconcerns it was too risky to pass muster with US regulators.
And that, according to one buy-side source, was in spite ofthe firm's strong track record of leveraging up and thenreducing debt quickly.
"What we have seen is more banks dropping out of processes,because they worry that they are off-sides with the guidelines,"said Jason Kyrwood, leveraged finance partner at Davis Polk.
Others say banks are grappling with tactical decisions, suchas trying to guess how big the fines could be - and weighingthat up against the fees for underwriting such deals.
The final decision from regulators is not expected untilsome time in summer, but banks are clearly expecting they willhave to pay at least a little bit - and possibly a lot more -for their decisions.
"Fines have to be regarded as a much more likely scenariothis time round," Forrester said. (Reporting by Natalie Harrison, Michelle Sierra and Lynn Adler;Editing by Marc Carnegie, Tessa Walsh, and Jonathan Methven)
Barclays (BARC)
