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Capital Markets

Regulatory firestorm rocks leveraged finance

In attempting to curb the excesses of the leveraged lending market, regulators might end up pushing it into the arms of the very private equity sponsors they are trying to rein in.

The leveraged finance market enjoyed a record year worldwide in 2013. As the number-one destination in the search for yield it attracted seemingly insatiable investor demand and corporates only too willing to take advantage of financing terms very much in their favour.

According to Morgan Stanley’s ‘Leveraged finance outlook’ for 2014, cov-lite loans as a percentage of total lending had hit 55% by the third quarter of 2013 – a big jump from 25% in 2007 and 7.4% in 2006. The percentage of these loans that were rated single B was 45.7% (compared with 32.7% and 24.5%). At $139 billion, LBO volumes for 2013 were far lower than for 2007 ($433.7 billion) and 2006 ($233 billion), but the volume of loans issued to fund dividends and buybacks was $51.4 billion, far higher than 2007’s $38.2 billion and 2006’s $40.3 billion.

However, it was not only investors and issuers that were paying close attention to the effervescence in the market – so too were the regulators. By March last year, the Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation seem to have decided that enough was enough, and announced new guidelines for leveraged lending, replacing those that had been in place since 2001.

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