Some Banks Move to Tighten Standards on Leveraged Loans, Fed Says

WASHINGTON — Some U.S. banks are tightening standards on leveraged loans as they seek to comply with new restrictions by regulators, according to a survey of loan officers released Monday by the Federal Reserve Board.

"In response to, or in anticipation of, the supervisory guidance, a number of large domestic and foreign survey respondents tightened standards on such loans, and no bank reported having eased standards," the Fed said in its Senior Loan Officer Opinion Survey, which is released every three months.

The Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, and the Fed issued guidance in March 2013 to encourage banks to improve underwriting standards on leveraged lending. Regulators cited concerns with the rapid growth in such lending by financial institutions, stoking fears standards could start to deteriorate.

In its report, the Fed asked bankers the amount of leveraged loans on their books and how companies have changed their lending practices as a result of the new guidelines.

The majority of large U.S. bank respondents said the amount of leveraged loans they held on their books was less than 20% of all commercial and industrial loans. Only one firm out of the 29 institutions polled said such loans equaled between 20% to 35% of C&I loans.

While a moderate number of banks said they changed their lending policies when it came to credit standards, maximum loan size and collateralization requirements, most large U.S. banks changed little.

Of the 38 firms that had C&I loans, only 11 firms said they tightened credit standards as a result of the supervisory guidance. The remaining 27 firms didn't make any alterations to their policies.

When it came to the maximum loan size, only four firms said they tightened "somewhat," while the other 33 companies made no changes. One firm, however, said they had eased standards slightly.

For collateralization requirements, roughly 92% of large banks kept the same policies with only two firms opting to tighten "somewhat."

But a dozen firms, or nearly one third of U.S. banks participating in the report, said they took steps to increase the maximum debt-to EBITDA (earnings before interest, taxes, depreciation, and amortization) restrictions.

Separately, the majority of bankers — roughly 90% of those that were polled — estimated that less than 20% of the leveraged loans they had underwritten would be impacted by the supervisory guidance.

"All but two large domestic banks judged that 20% or less of leveraged loans that typically have been underwritten or participated in by their bank had been or would be curtailed or significantly altered by the supervisory guidance," the Fed survey found.

Still, large domestic banks said supervisory guidance caused the dollar volume across all types of loans to fall somewhat for the purposes of leverage buyouts or capital distributions; mergers and acquisitions; and refinancing.

For example, 10 banks said dollar volume decreased somewhat when it came to leveraged buyouts or capital distributions. Similarly, nine firms said the same for loans tied to mergers and acquisitions.

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