The European Central Bank may hold a public consultation into leveraged finance as it seeks to pare market risks.
The process may begin in the next two months, an official at the Frankfurt-based institution said in an e-mailed response to Bloomberg News questions. The focus will be on leverage, or the amount a company can borrow relative to earnings, according to a person familiar with the matter, who asked not to be identified as the process isn’t yet public. A formal paper may be released in the first quarter of next year, the person said.
The ECB said in March that it’s looking at risks in leveraged loans, which banks often make to a company being bought by a private equity firm to help pay for the takeover. U.S. regulators have similarly tried to curb banks’ exposure to loans made to heavily indebted companies, including issuing 2013 leveraged-lending guidelines that expressed concern about debt levels exceed six times earnings.
“The development actually gives arranging banks some ability to push back with issuers seeking aggressive leverage,” said Desmond English, a London-based fund manager at Pioneer Investment Management, which oversees 224 billion euros ($250 billion). “Having the same in Europe would not be a cause of concern for me as long as it was implemented correctly.”