Business

Regulator rule change has US lenders fearful

Major US banks are running away from lending to highly leveraged buyouts, industry statistics show.

Bank of America, JPMorgan Chase, Wells Fargo and Citigroup have all fallen far down the list of top LBO lenders in 2014 after regulators pressed changes that would have made such loans more expensive.

Stepping away from such business will surely crimp profits and is one example of how new regulations are forcing changes to the banking sector.

BofA earned roughly $140 million in 2013 from financing new LBOs, sources said.

The banks, which were all among the top 11 LBO lenders in 2011 to 2013, could do no better than No. 18 in 2014, according to Thomson Reuters LPC statistics shared exclusively with The Post.

The change comes after the Office of the Comptroller of the Currency (OCC) stepped up a campaign last year against such highly leveraged buyout financing.

The OCC and the Federal Reserve in the fall told the major banks if they funded new LBOs that had greater than six times debt-to-earnings before interest, taxes, depreciation and amortization (Ebitda) ratios, they would have to consider them non-conforming loans and hold more cash against them, sources said.

A partner at a large private-equity firm said, “JPM and BoA are turning down deals” — but that

“Morgan Stanley and Credit Suisse are being aggressive.”

Banks, more sensitive to stepped-up regulations, are toeing the line more than brokerages.

“All the [big] banks want to show they are turning down over-levered deals,” said a source who helps finance buyouts. “They want to say we only did 10 deals and passed on 30.”

JPMorgan is still doing deals—presently financing a $1.7 billion buyout of Catalina Marketing that has not closed and is not reflected on the charts.

But still, the volume is down.

Private-equity firms including KKR and Carlyle typically buy companies by putting 25 percent of the cash down and funding the rest by borrowing against the businesses they are acquiring. They typically saddle their businesses with more than six times debt-to-ebitda ratios.

Regulators will allow a highly leveraged deal to proceed as normal if a bank can show that either the company can pay off half its debt in seven years, or all of its first-lien (most secured) loan in that period, sources said.

That becomes a very subjective judgment, sources said, as banks are not putting covenants in their loans that actually force companies to pay back their loans.