LSTA, ABA seek one-year extension to implement leverage lending rules

By Susanna Moon

Chicago, April 12 - Loan Syndications and Trading Association and the American Banking Association are seeking 12 more months to implement the industry's new leverage lending guidance, saying that it could take up to 10,000 hours to make the needed changes to the banks' systems.

Regulators issued the guidance on March 22, effective on that date, with a compliance date of May 21, the letter noted.

The banks expect the changes to their systems to be much more time consuming than the agencies have estimated, according to the trade groups.

"The guidance requires the potential implementation of significant changes to our member institutions' policies and procedures, as well as their management information systems that are not possible within the two-month period provided for in the guidance," the industry associations said in a joint letter to regulators.

The letter addresses the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corp.

In order to implement the guidance, banks must revise their risk management framework and policies and procedures, including their underwriting, stress testing, and reporting policies and procedures, which require "thoughtful consideration" and approval by management and the board of directors.

Then, management information system coding must be developed and implemented, outstanding loans must be re-coded, and testing performed to correct for errors, the letter noted.

But even the OCC has estimated that it will take 1,350 hours per bank to build the system, which would mean employing at least four full-time workers for more than eight weeks, according to the trade groups.

Guidance background

The updated supervisory guidance on leveraged lending released last month replaces guidance issued in April 2001 and applies to financial institutions supervised by the agencies that engage in leveraged lending activities.

In a previous joint news release, the three government agencies said the volume of leveraged credit transactions has grown since the financial crisis, and "prudent underwriting practices have deteriorated."

For example, they said some debt agreements have excluded "meaningful maintenance covenants," capital and repayment structures for some transactions have been "aggressive," and management information systems at some institutions have proven "less than satisfactory in accurately aggregating exposures on a timely basis."

As noted before, the guidance describes expectations for the risk management of leveraged lending activities and said institutions should develop and maintain

• Transactions structured to reflect a sound business premise, an appropriate capital structure and reasonable cash flow and balance sheet leverage;

• A definition of leveraged lending that facilitates consistent application across all business lines;

• Well-defined underwriting standards that define acceptable leverage levels and describe amortization expectations for senior and subordinate debt;

• A credit limit and concentration framework consistent with the institution's risk appetite;

• Management information systems that enable management to identify, aggregate and monitor leveraged exposures and comply with policy across all business lines;

• Pipeline management policies and procedures that provide for real-time information on exposures and limits and exceptions to the timing of expected distributions and approved hold levels; and

• Guidelines for conducting periodic portfolio and pipeline stress tests to quantify the potential impact of economic and market conditions on the institution's asset quality, earnings, liquidity and capital.

LSTA's initial response

As reported, the LSTA applauded the agencies' decision to refine their guidance but said it remains concerned about a "one-size-fits-all" approach in a news release.

The LSTA said it is gratified that the agencies decided to exclude asset-based loans and fallen angel credits from the guidance and that the agencies refined a rule requiring banks to analyze every financial sponsor in all sponsored transactions. The LSTA recommended that banks only be required to analyze and report on a sponsor when it guarantees a leveraged lending transaction.

On the other hand, the LSTA expressed concern that the agencies still require a company to show the ability to fully amortize its senior secured debt over five to seven years using base cash flows.

"Different industries operate with different levels of debt, and the LSTA believes imposing such a 'one-size-fits-all' model for all industries does not accurately represent different companies' risk profiles and runs the risk of reducing financing for many companies," LSTA said in the previous news release.

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