Wall Street banks are seeking additional details from U.S. regulators on their leveraged-lending guidelines, which are intended to improve underwriting standards.
Three industry groups representing lenders from JPMorgan Chase & Co. to Credit Suisse Group AG are preparing a letter to the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. asking the regulators for more clarity on the kinds of loans they deem too risky, according to three people with knowledge of the discussions.
Among questions they want answered is whether regulators will apply different criteria depending on the industry. While the supervisors are discouraging loans that raise debt levels to more than six times a measure of a company’s profitability, the groups want to know if the same standards apply to companies such as real-estate firms that typically rely on more leverage, according to one of the people, who asked not to be identified because the discussions are private.
“Banks are looking forward to receiving greater clarity as there has been some confusion over the past year,” Richard Zogheb, co-head of capital markets origination for the Americas at Citigroup Inc., said in an e-mailed statement.
The Loan Syndications & Trading Association, Commercial Finance Association and International Association of Credit Portfolio Managers plan to send the letter within the next few weeks, the people said.
The regulators are clamping down on underwriting standards in a market that has swelled amid easy-money central bank policies that have pushed investors into riskier assets. Leveraged loans, which are typically rated below BBB- by Standard & Poor’s and lower than Baa3 at Moody’s Investors Service, are often used to finance buyouts.
Issuance of new loans is up about 19 percent this year to $250 billion, according to data compiled by Bloomberg.
“We have heard that the banks are working hard to conform with the guidance but we have also heard that there remains some confusion around some of the leveraged-lending guidance definitions,” Meredith Coffey, the LSTA’s executive vice president of research and analysis, said in an e-mailed statement. “For this reason, banks are asking some of the trade associations to seek additional clarity.”
In the guidance released last year, the regulators said “prudent underwriting practices” had “deteriorated” and that debt levels of more than six times earnings before interest, tax, depreciation and amortization “raises concerns.”
Underwriting should also consider a borrower’s ability to pay down debt to a sustainable level within a “reasonable period,” they said.
The LSTA represents lenders including Bank of America Corp., Goldman Sachs Group Inc. and Citigroup. IACPM has 90 member institutions around the world that manage portfolios of corporate loans, bonds and other credit products. Most of CFA’s about 300 members are non-bank financial institutions and the organization represents the asset-based lending industry, according to its website.
“Our members, many of whom manage the risk profile for credit portfolios, have expressed the desire to get a bit more clarity,” Som-lok Leung, executive director of the IACPM, said in a telephone interview.
CFA chief operating officer Brian Cove declined to comment.