NEW YORK (Reuters) - US leveraged lending guidelines could ease if a Wall Street-friendly Trump administration tells regulators to take a more lenient line on enforcing the rules, bankers, investors and lawyers said.
The guidelines, which were introduced by the Federal Reserve (Fed), the Federal Deposit Insurance Corp (FDIC) and the Office of the Comptroller of the Currency (OCC) in 2013, have reduced the amount that banks lend to highly-indebted companies and put a brake on buyout deals.
President-elect Donald Trump’s nominations and appointments of individuals with business and investment banking backgrounds who are familiar with these high-risk transactions are raising hopes that the guidance may be relaxed, rather than removed, by new political appointees.
“I’m not saying the actual policy is going to change but the implementation of it, the take no prisoner stance of the Fed, I think that could change essentially overnight,” a senior leveraged loan banker said.
Steve Mnuchin, a former Goldman Sachs partner and cofounder of regional bank OneWest, has been nominated as Treasury Secretary. Distressed debt investor Wilbur Ross, a familiar face in the leveraged loan market since the early 2000s, has been appointed as Commerce Secretary.
Both Mnuchin and Ross have been vocal critics of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was put in place after the financial crisis.
Relaxing the guidelines gradually would free commercial banks to offer highly leveraged loans. This could help drive higher levels of merger and acquisition (M&A) activity, as Trump targets higher growth by allowing companies to repatriate overseas cash and by cutting taxes.
“We are certainly not expecting any rapid change in the regulatory environment. I think generally across sectors the view is that the way deregulation happens from practical perspective is not by changing regulation but by reducing enforcement. So the rules are still on the book but there is less enforcement,” a second banker said.
The guidelines, which were designed to curb loans for companies leveraged above 6.0 times debt-to-earnings before interest, tax, depreciation and amortization (Ebitda) and also measured companies’ ability to repay, have succeeded in driving leverage levels lower.
Average total leverage on large corporate buyout deals peaked at 7.4 times in the second quarter of 2007 but fell below six times after the guidelines were enforced more stringently from 2014.
Leverage higher than 6.0 times was seen on 59.8% of leveraged buyout deals in 2014, just short of a pre-crisis high of 61.5% but tighter implementation of the guidelines has cut this to a four-year low of 47.4% of leveraged buyout deals this year, according to Thomson Reuters LPC data.
“Leveraged lending guidelines have been great in protecting the market from itself, from things getting too aggressive and lousy deals getting done,” a portfolio manager said. “If anything changed there, that could be quite important to the market.”
The introduction of the guidelines has driven riskier lending into the shadow banking sector and helped lenders not subject to the guidance, including Jefferies, Macquarie, Nomura, credit arms of private equity firms and business development companies (BDCs) to gain market share.
Fewer highly leveraged loans have, however, been seen across the board since the guidelines were introduced. One lender not subject to the guidance estimated that only 10% of the deals that his firm underwrites have leverage of more than 6.0 times.
Revising the rules would take all three regulators to agree, as they are guidelines and not a law that the president could overturn, even if it was deemed a priority.
“If it is a high priority for the Trump administration, my bet is that the guidance gets relaxed,” said Richard Farley, chair of the leveraged finance group at Kramer Levin Naftalis & Frankel LLP.
The Fed, the FDIC and the OCC all declined to comment. Trump’s transition team also declined to comment.
Reporting by Jonathan Schwarzberg and Lynn Adler; Editing By Michelle Sierra and Tessa Walsh; Additional reporting by Davide Scigliuzzo