Uber’s $1.5 Billion Debt Deal Touches a Nerve on Wall Street

Updated on
  • Banks left out of deal as they await new lending guidelines
  • Morgan Stanley draws attention by snagging adviser role
Photographer: Chris J. Ratcliffe/Bloomberg

For the select group of Wall Street bankers who specialize in doling out leveraged corporate loans, these are exciting, and anxious, times.

Exciting because they’ve been told by regulators in the Trump administration that they’re now freer to take on more risk. Anxious because they’re waiting for those instructions -- which were communicated verbally at a conference last month -- to be turned into official policy so they can have the confidence to start pursuing the kinds of deals that used to land them in trouble.

Deals like the loan expected to price in the coming days by Uber Technologies Inc. With the memory still fresh in their minds of how a similar Uber loan agreed in 2016 earned them a reprimand from regulators, some banks held back from the deal, people familiar with the matter said. Uber marketed it directly to investors. (Demand was so strong that the transaction was boosted to $1.5 billion on Monday before word emerged that an Uber self-driving car fatally struck a pedestrian.)

There’s a palpable sense of missing out -- or FOMO in today’s vernacular -- coursing through the community of leveraged-loan bankers: When Morgan Stanley was named an adviser to Uber on the transaction, some of its rivals fumed in private. What exactly did an advisory role entail, they wondered, and was it just a workaround that allowed the bank to arrange and distribute the loan for Uber the way that a traditional bookrunner would. A representative for Morgan Stanley declined to comment as did a representative for San Francisco-based Uber.

“You are in a period of limbo,” said Michael Alix, a partner at PwC and a former Federal Reserve official. And it “is uncomfortable for everybody.”

Leaning on Leverage

Total debt-to-Ebitda on M&A-linked loans creeps ever higher

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While the pace of change is quickening now in the leveraged loan market, it has actually been underway for a while. Ever since President Donald Trump came to office, compliance with the leveraged loan guidance, as it is known, started to weaken, helping drive debt ratios in the riskier corporate loan market to record levels. That may be OK when earnings are posting strong growth, like now, but the concern among more cautious policy makers is how these loans perform when profits start to slump and borrowing costs climb.

The lending guidance in question emerged in the aftermath of the financial crisis to prevent debt-heavy buyouts that hobbled firms -- the effects of which are still being felt, with iHeartMedia Inc. filing for bankruptcy just this month. The guidance has been under fierce discussion amid Trump’s hands-off stance on regulation, which has already unraveled other post-crisis rules.

Debt Limit

The guidance included one particular provision to cap the debt banks could pile on to companies. Lenders were limited from providing debt in excess of six times a measure of earnings, knowing any such deal would likely attract regulatory scrutiny. The instructions also emphasized the borrower needed to show it could repay a significant portion of the total loans over a sustained period.

Uber’s loan plan, on the face of it, would stretch at least some of those stipulations. The company still does not generate positive earnings, according to documents seen by Bloomberg News. That makes its leverage ratio mathematically meaningless. At its loan pitch in New York earlier this month, it touted its growth prospects, its $10 billion liquidity position, as well as its $5.7 billion of pro-forma cash, as it sought to attract investors directly rather than going through banks.

And the company’s ability to boost the size of the loan -- as well as on Wednesday its success in reducing the amount of interest it pays -- is a sign it’s hotly demanded by investors who’ve been deprived of juicier yields as interest rates remained low.

Powell, Otting

What’s accelerated the desire for clarity from lenders are explicit statements from two regulatory agency heads. Joseph Otting, the comptroller of the currency, said at a Las Vegas conference in February that banks “should have the right to do the leveraged lending they want as long as they have the capital and personnel to manage that and it doesn’t impair their safety and soundness.” Federal Reserve Chairman Jerome Powell said in testimony to lawmakers that it may put the current guidance on riskier lending out to consultation. Both said the instructions were not meant to be viewed as binding.

The life of the leveraged lending guidance wasn’t straight forward. Regulators published it in 2013 though it had to be clarified in 2014 before banks understood and complied. Last fall, the Government Accountability Office said the more stringent guidance amounted technically to “rules”. The distinction was important because it meant as rules, they need to be submitted for Congressional review. That had never happened, leading some to say they shouldn’t be enforced.

‘Safe, Sound’

“Regulators were never clear as to where the goal posts were,” said Mark Okada, co-chief investment officer of Highland Capital Management. They “applied the guidelines arbitrarily in an attempt to simply reduce leveraged lending in total.”

The guidance was issued by the Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation and the U.S. Office of the Comptroller of the Currency. A representative for the Federal Reserve declined to comment.

A representative for the FDIC said it “distinguishes between the requirements of laws and regulations, which are legally binding and enforceable, and supervisory guidance, which itself is not enforceable but sets forth information, including the factors the FDIC considers when exercising its supervisory authority.”

The OCC provided written comment that leveraged lending “must be conducted in a safe and sound manner.” That included maintaining appropriate policies, procedures, controls, and personnel competency commensurate with the level of risk presented by the bank’s leveraged lending activities, it said.

— With assistance by Sridhar Natarajan

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