The Federal Deposit Insurance Corporation, Board of Governors of the Federal Reserve System, and the Office of the Comptroller of the Currency (the “Agencies”) have issued answers to commonly asked questions (the "FAQs") about the Interagency Guidance on Leveraged Lending (the “Guidance”) in an effort to provide clarity to the leveraged lending market.
The "Agencies" issued the "Guidance" in early 2013, which defined leveraged lending and addressed the content of credit policies and underwriting and valuation standards. The "Guidance" is meant to help institutions strengthen their risk management. For instance, according to the "Guidance", institutions should consider a company's ability to fully amortize senior debt or repay at least half of total debt over a five- to seven-year period. In addition, leverage over six times EBITDA also is problematic.
The "Guidance", however, raised questions and concerns among institutions and prompted the "Agencies" to issue the FAQs to provide some clarity. The "Agencies" made clear in the FAQs that they "expect institutions to originate loans with a sound business premise, a sustainable capital structure, and borrower capacity to repay the loan or to de-lever to a sustainable level over a reasonable period."
However, the FAQs likely will generate more questions. For example, the "Agencies" stated that they do not view leverage exceeding six times EBITDA as a bright-line test. "Leverage is an important indicator, but it should be considered in relation to other loan characteristics."
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