Tags: Banks | leverage | buyout | debt

WSJ: Banks Continue to Finance High-Debt Takeovers, Despite Regulators' Warnings

By    |   Thursday, 22 May 2014 11:01 AM

Regulators have admonished big banks to cut down on lending for private-equity acquisitions that involve high levels of debt.

But the banks are ignoring the warnings, The Wall Street Journal reports.

In 2013, the Federal Reserve and the Office of the Comptroller of the Currency issued guidance requesting that banks stay away from most leveraged buyouts that would leave a company saddled with debt amounting to more than six times its earnings before interest, taxes, depreciation and amortization (EBITDA).

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But 40 percent of U.S. private-equity buyouts this year have included leverage above the six-times-EBITDA threshold, according to S&P Capital IQ LCD. That is the highest proportion since the 52 percent recorded in 2007 before the financial crisis.

For example, Blackstone plans to acquire Gates Global for $5.4 billion, which would increase Gates' debt levels to approximately seven times EBITDA. The acquisition is being financed by Citigroup Inc., Credit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley and UBS.

Renaissance Learning's leverage ratio rose to about 7.5 times after it was purchased in April for $1.1 billion by Hellman & Friedman. That transaction was financed by Bank of America, Credit Suisse and RBC Capital Markets.

According to The Journal, which cited someone briefed on the deal, the banks on the Renaissance acquisition consider it acceptable under the guidance because the company should be able to quickly pay down debt with its recurring revenue and high cash flow. Banks believe the Gates deal is acceptable because the company has high cash flow that can enable it to repay debt, a person familiar with that deal told The Journal.

"A lot of work has been done to date by the agencies to assess compliance with the guidance, but clearly much more work remains to be done and stronger supervisory action may be needed," Todd Vermilyea, senior associate director in the Fed's Division of Banking Supervision and Regulation, said at an event last week, The Journal reports.

Mergers and acquisitions (M&As) in general are booming this year, and that may turn into a problem for the stock market, says Bert Dohmen, president of Dohmen Capital Research Institute.

Global M&A volume surged 23 percent to $804.5 billion in the first quarter from a year earlier, according to Dealogic. That's the best first quarter for the industry since 2008.

"M&A is getting a little crazy now," Dohmen tells CNBC. "Now does anyone remember what happened in 2008, wasn't there some kind of a global crisis? When you reach a peak in M&A it's usually a peak in the stock market."

Editor’s Note: Dow Predicted Will Hit 60,000 — Buy These 4 Stocks Now

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Regulators have admonished big banks to cut down on lending for private-equity acquisitions that involve high levels of debt.
Banks, leverage, buyout, debt
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2014-01-22
Thursday, 22 May 2014 11:01 AM
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