HLT Definition May Get Airing; Banks Hope for Regulatory Relief

Federal bank regulators may soon ask banks and other interested parties to comment on the government's controversial definition of highly leveraged transactions, or HLTs.

"We're considering it," a bank regulator in Washington said Friday, confirming rumors that the HLT issue might be opened up for the first time to public comment.

Bankers and other experts view the development as a possible preclude to some form of regulatory relief. Banks are inhibited from making loans classified as HLTs because the credits are automatically viewed as risky by investors and the regulators themselves.

Opening up the HLT issue for public comment would probably produce an outpouring of criticism of the definition by bankers and borrowers alike.

Basis for Prediction

Critics of the definition reason that the regulators would not solicit public comments unless they are at least prepared to loosen it.

Many bankers would like to see the HLT classification eliminated entirely, although that is considered unlikely.

The definition, jointly adopted by three federal agencies in February 1990, essentially requires banks to classify loans used to finance buyouts, acquisitions, and recapitalizations as HLTs if the borrowers' leverage ratios exceed 75% as a result of the transactions.

Critics say the definition has taken on the characteristics of a regulation, though it was not promulgated as one.

Complaints from Lenders

Bankers complain that the HLT designation has become a stigma that forces them to withhold loans even to creditworthy customers.

Though the definition has been the subject of intense behind-the-scenes lobbying, by bankers and borrowers alike, the HLT issue has never before been opened up for a full-fledged public airing.

It's not clear what prompted regulators from the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corp. to consider such a move now.

Decision in Near Future

Robert Miailovich, assistant director of the division of supervision at the FDIC, said a decision on opening up the HLT definition for public comment probably will be made within the next few weeks.

Apart from the banks, one of the industries most affected by the HLT definition is the cable-television indsutry.

Though no one disputes that many cable companies are highly leveraged, bankers and industry executives argue that they should not be judged based on their balance sheets, but on cash flow.

Role for Cash Flow

The HLT definition doesn't take a borrower's cash flow into account. Bankers say that, at the least, the definition should be amended to include a cash flow test.

If such a test were included, many loans now classified as HLTs could be delisted, bankers say.

If Federal Reserve Board Chairman Alan Greenspan hasn't heard that argument yet, he probably will soon, when he meets with a small group of media industry and bank executives on the HLT issue.

The meeting, which is scheduled for June 20, was arranged by Robert Forrestal, president of the Federal Reserve Bank in Atlanta.

Mr. Forrestal arranged the meeting on behalf of an Atlanta media-industry official.

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