Lenders Bombard Bank Regulators With Criticism of HLT Definition
Federal regulators this week will begin poring over highly critical public comments on the way banks are required to classify loans to highly leveraged borrowers.
The deadline for filing comments was last week, and regulators said that the response was heavy.
New Rule May Be Imminent
With the comment period over, nearly two years of confrontation between bankers and regulators about the definition of so-called highly leveraged transactions may be winding down.
Regulators could decide to revamp - or possibly even abandon - the definition as early as this fall, said an official at the Federal Deposit Insurance Corp., one of the three agencies that jointly solicited the comments this past summer.
The HLT definition was adopted in February 1990 by the FDIC, the Office of the Comptroller of the Currency, and the Federal Reserve.
Loans are generally classified as HLTs if they are used for acquisitions or recapitalizations, and result in a doubling of the borrower's liabilities, or a liabilities-to-assets ratio of over 75%.
"The definition succeeds in capturing some overleveraged credits, but it also unfairly stigmatizes many sound borrowers," said one borrower in a typical complaint.
Cable Industry Is Vocal
Among borrowers, the cable television industry probably has been the most active opponent of the HLT definition, because most cable credits are classifed HLTs.
Indeed, many of the comments submitted to regulators came from cable companies and banks that lend to the industry.
Many critics would like to see the outright elimination of the definition. At the least, they want regulators to consider a borrower's cash flow, not just its balance sheet, in applying the HLT definition.
"While most banks understand that the creditworthiness of many |cash flow' borrowers is unrelated to the definition's tests, [banks'] own sources of capital do not," officials at Continental Cablevision Inc. said in their written statement to regulators. As a result, the Continental officials added, banks have avoided making HLT loans to protect their access to capital.
Bankers and borrowers generally have been leery of predicting how regulators will respond to the raft of negative comments about the definition.
However, many assume that regulators would not have sought the comments if they were not prepared to give some ground.
"If our feet were in concrete, we probably would not have gone out for comment," acknowledged Garfield Gimber, an examination specialist in the FDIC's office of supervision.
He said the cash-flow issue will be considered "very carefully," and added that there is a "realistic chance" that the definition could be eliminated entirely.
As for the borrowers affected by the definition, "There is a prevailing sense of hope, but not a prevailing sense of optimism," said Nancy Hawthorne, a Continental official who helped write the company's response.
In a telephone interview on Friday, she expressed concern that regulators will make a good-faith attempt to fix the definition, but that the solution will produce other, unintended problems.