Confusion reigns in leveraged land
By Natalie Harrison
NEW YORK, Dec 19 (IFR) - Bankers specialising in leveraged loans and high-yield bonds say 2015 will start off in a similar fashion to 2014: with the same level of confusion about how to interpret US regulators' leveraged lending guidelines that have been in force for almost two years now.
Only bankers seem to be getting that little bit more frustrated.
There have been some dramatic developments over the past 12 months: Credit Suisse got its wrists slapped (when it received a so-called "Matters Requiring Immediate Attention" letter from regulators) for being overly aggressive on buyout loans it underwrote - the first real "punishment" for a bank involved in leveraged lending.
And regulators have increased pressure by scrutinising banks' loan books on a monthly basis rather than annually.
But just three weeks or so after a big showdown between bankers and regulators in New York (in which regulators told banks that 10 out of 18 buyout loans they had sampled were considered "special mention"), two buyout deals with leverage over the six times limit that the FDIC, the Fed and the OCC say is problematic have surfaced - for retailer PetSmart and technology firm Riverbed.
Bankers who chose not to pursue the US$8.7bn leveraged buyout of PetSmart - the biggest LBO of the year - on the assumption that the loan would be considered "non-pass" by regulators could be forgiven considerable annoyance when they watched other lenders grab the deal - and the roughly US$180m of fees that come with it.
The banks that chose to do the deal - Barclays, Citigroup, Deutsche Bank, Jefferies and Nomura - argue that the deal will pass on the basis of how quickly the company could pay down the debt.
"Just look at the public documents and see what Ebitda [and therefore leverage] is," said one frustrated senior leveraged banker, whose firm thought the deal would be a non-pass. "It illustrates how different banks are making different judgments on what is acceptable for regulators."
With almost US$7bn in debt, the financing includes a roughly US$4bn leveraged loan, a US$2bn bond issue and a US$750m asset-backed revolver - putting leverage in the ballpark of 6.5 times Ebitda of US$956m.
WHERE NOW?
Riverbed is the other deal that has grabbed attention because leverage is even higher - almost seven times.
One of the underwriters on that deal happens to be Credit Suisse, leaving some to question whether the MRIA it received was really that severe after all. Barclays and Citigroup, meanwhile, are on both PetSmart and Riverbed.
There's no clarity either on whether JP Morgan - the only major bank to underwrite the 11 times leveraged buyout of Tibco Software by Vista Equity Partners back in October - has had a warning. JP Morgan isn't involved in the financing for the PetSmart deal as it was conflicted.
While banks across the industry have taken a chance over the past 12 months and have massaged Ebitda figures to get leverage multiples to levels they hope will satisfy the regulators, it is unclear where things will go from here.
"Regulators say the rules are clear, but we would say they are not because banks needs to make a judgment on each deal based on future cashflow projections and a company's ability to pay down debt. That is subjective," the banker said.
Maybe the market will decide - the buyside has already pushed back hard on deals with big earnings adjustments, including Tibco.
"The leverage on PetSmart is lower than it probably would have been before the guidelines. That is progress. But how do they expect banks to keep saying 'no' if they're seeing their competitors do it," the banker said.
(Reporting by Natalie Harrison; Additional reporting by Michelle Sierra; Editing by Chris Mangham and Matthew Davies)
