* US rules set to be softened
* Global regulatory position could be muddied
By Claire Ruckin
LONDON, May 18 The ECB has published its final
guidelines to rein in risky lending practices among banks,
mirroring rules already introduced in the US in 2013.
The publication of the leveraged lending guidelines comes at
a time when the US is considering softening its rules, which
grew out of the last financial crisis and effectively block
banks from making loans to companies with a debt-to-earnings
ratio greater than six times.
"Europe is introducing a set of guidelines thinking it is
playing catch up with the US but arguably is aligning to a
position the US was in yesterday rather than tomorrow," said
Ropes & Gray finance partner Malcolm Hitching.
Banks regulated by the ECB are now trying to organise
internally to make sure they can monitor and comply with the
guidelines, which are set to come into force in six months, with
the first audits in 18 months.
While it was assumed the introduction of the European
guidelines would even the playing field between European
institutions and their US counterparts, any reversal or
diminishing of the rules in the US could reverse the competitive
"What the US chooses to do will probably become the default
position the majority of institutions globally will adhere to.
Specifically European institutions will align with the ECB but
everyone else will be in a different situation, so rather than a
consolidation of the regulatory landscape, the ECB's LLG might
end up confusing the matter," Hitching said.
The final ECB guidelines broadly mirror those in the US,
especially after a controversial definition of Ebitda was toned
down. It had become a flashpoint in the consultation when it was
referenced as unadjusted, unlike in the US, but the final
guidance allows for enhancements to Ebitda as long as they are
"There are adjustments to Ebitda that are justified and made
by sponsors in order to reflect the reality of businesses as
they grow and evolve," said Kirkland & Ellis finance partner
While bankers welcomed the changes to the Ebitda definition,
they remain concerned about the scope of the new rules.
Leveraged transactions remain defined as all types of loans
or credit exposure where the leverage exceeds four times total
debt to Ebitda and where the borrower is owned by one or more
financial sponsors. High leverage of six times total debt to
Ebitda should remain exceptional and companies should be able to
repay at least half of total debt over a five to seven-year
Although the ECB added exceptions to the definition for
small and medium-sized enterprises and investment-grade
borrowers, the guidelines still have a broad remit.
Corporate business and infrastructure loans as well as loans
made to crossover Double B issuers could get caught by the new
rules, as could acquisition and capital expenditure lines and
so-called "freebie baskets" that allow for an extra turn of
leverage to be added on to a business without the permission of
"Documentation has become very loose, especially the use of
freebie baskets and you can use the guidelines to push back on
these things," a head of leveraged capital markets said.
A lawyer added: "The guidelines are there to limit risk but
should not be sweepingly used as a tool for banks to hide behind
in a bid to pare back aggressive but justifiable sponsor terms."
There is a question mark over the consequences of not adhering
to the new rules and while most banks will take a more cautious
approach, the expectation is that some will seeks ways to work
around the guidelines.
"Banks will find ways to make sure there are plenty of
creative financials to finance leveraged buyouts, in order to
make sure returns are not lessened. The extent to which the
international banking community will stand behind the guidelines
is up for question, as they are not a draconian set of rules
with sanctions and punishment attached to them," a lawyer said.
It is likely, however, that a number of institutions such as
direct lenders and banks not captured by the guidelines
(including the likes of Jefferies, Macquarie and Nomura) will
look to strengthen their position and increase market share.
(Editing by Christopher Mangham and Matthew Davies)