Leveraged Lending Pullback Tied to Regulatory Scrutiny

Large U.S. banks may be heeding the warnings of regulators and staying away from highly leveraged deals.
Matthew HellerOctober 23, 2014
Leveraged Lending Pullback Tied to Regulatory Scrutiny

Large U.S. banks cut back on leveraged lending in the third quarter of this year, a trend that likely reflects growing regulatory scrutiny, Fitch Ratings said Thursday.

Last year, federal regulators warned that while leveraged lending declined during the financial crisis, volumes had since increased and prudent underwriting practices had deteriorated. Thursday’s bulletin from Fitch suggests large banks are taking heed of the warning.

Bank of America (down 12%), Citibank (down 16%), Goldman Sachs (down 39%) and JPMorgan Chase (down 20%) all showed third-quarter declines in debt underwriting revenues, of which leveraged lending revenues are a component, Fitch said.

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“Comments made by several banks during third-quarter earnings calls attributed debt underwriting drops, at least in part, to reduced leveraged lending and increased regulatory scrutiny of that business,” the ratings service noted.

The decline in leveraged lending may also be due to reduced refinancing activity after the record leveraged lending of 2013, Fitch reported, but “would be viewed positively from a rating perspective and may bode well for banks’ results under upcoming Shared National Credit reviews.”

The Federal Reserve Board, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency issued updated lending guidance in March 2013. In an indication of the increased scrutiny of leveraged lending, the Fed earlier this year warned Credit Suisse Group that its underwriting and sale of leveraged loans was possibly out of compliance with the new guidelines.

Aside from Credit Suisse, Fitch said it was “unaware of any other banks that have been explicitly called out for their leveraged lending activity. Nevertheless, the reduced debt underwriting suggests many banks have taken the warnings with elevated seriousness.”

Overall, leveraged loan and debt underwriting was down 17% through the first nine months of 2014 while leveraged bond underwriting was off 7% over the same time period, according to data compiled by Fitch.

Moody’s Investors Service reported last month that the percentage of leveraged lending in the first half of this year with weak or the weakest covenant protections reached its highest level since the Great Recession.