Fitch says that banks are cutting back on their leveraged lending due to growing regulatory scrutiny and the need to prepare for future Shared National Credit (SNC) reviews. The reviews are carried out in the spring and the results of the latest review are to be published soon.
Fitch’s data shows that overall leveraged loan and debt underwriting was off 17 percent through the first nine months of 2014 and leveraged bond underwriting was off 7 percent. Four of the five largest US investment banks saw declines in third-quarter debt underwriting revenues: Bank of America (down 12 percent, vs. 2Q), Citi (down 16 percent), Goldman Sachs (down 39 percent) and JPMorgan Chase (down 20 percent).
US regulators issued leveraged lending guidelines in early 2013, but have since shown annoyance that banks have mostly ignored them. Specifically, in September the Federal Reserve criticized Credit Suisse for failing to adhere to the guidelines.
The guidelines tell banks not to make loans if the borrower cannot amortize or repay all senior debt from free cash flow, or half their total debt, in five to seven years. They also warn against making loans that result in a borrower’s leverage level exceeding six times debt to Ebitda after asset sales.
Part of the decline in leveraged lending is attributable to less refinancing activity, which swelled volumes in 2013. However, Fitch believes that the reduced debt underwriting means banks are taking regulators’ concerns more seriously. The most recent SNC review focused attention on leveraged lending; the results, when published, should give borrowers a better view of how the market will operate going forward.