Wall Street banks take heart from leveraged loan exams
Wall Street banks have found a U.S. review of their junk-rated loans to have yielded similar results to last year, easing some concern among bankers about a crackdown on one of their most lucrative businesses.
Making junk-rated loans to companies is a lucrative, high-margin business for major Wall Street banks. Last year leveraged loans generated $1.47 billion in fees in the United States alone.
Leveraged loan issuance has kept a robust pace as investors chase yield amid the Fed’s cheap money policy. U.S. leveraged loan issuance reached $527 billion in the first half of 2014. Last year, it reached a record $1.14 trillion, up 72% from the year before, according to Thomson Reuters Loan Pricing Corp.
Regulatory guidelines do not set an absolute limit on leverage, and instead say that loans that would increase the borrower’s debt levels to more than 6 times its cash flow raise “concerns for most industries”. The percentage of leveraged buyouts is now flirting with the 57% all-time high seen in 2007, prior to the financial crisis.
In the previous review, published in September 2013, regulators expressed dissatisfaction with the results. The Fed and the OCC have also sent private letters to banks last year expressing concerns about it.
Some bankers said they feared regulators may still crack down on them, using criteria in the guidelines that are more subjective, such as the fuzziness around the leverage threshold. They said regulators have been strict about some elements of their guidance, which has boosted compliance.
Source: Reuters
