Between late November 2016 and the end of January 2017, the ECB engaged in a public consultation on the draft guidance on leveraged transactions (the "Guidance"). The Loan Market Association ("LMA"), the trade body for the syndicated loan markets in EMEA, participated in the consultation process and published a written submission on 26 January 2017. We examine the scope of the Guidance and its potential impact. We also look at the LMA's submission, as part of the public consultation.
Why was the Guidance issued?
In 2015, the ECB surveyed a number of credit institutions. The results revealed that globally, leveraged finance markets have recovered well since the crisis. The EU has enjoyed a long period of low interest rates resulting in strong competition in the search for yield and increased new business by credit institutions. In addition, the prevailing market conditions appear to have translated into less stringent covenants and the introduction of "covenant-lite" borrower-friendly structures into European markets. All of these factors have elicited specific attention from the ECB and given cause for it to consider affording closer supervisory scrutiny to leveraged transactions.
Who does the Guidance apply to?
The Guidance, when finalised, will apply to all "significant credit institutions" supervised by the ECB under Article 6 (4) of the SSM Regulation. The ECB determines a credit institution to be "significant" based on, amongst other factors, the following:
the total value of assets; its importance for the economy of the country in which the credit institution is located or the EU as a whole; the scale of its cross-border activities; and whether it has requested or received public financial assistance from the European Stability Mechanism (ESM) or the European Financial Stability Facility (EFSF). The significant supervised entities regulated in Ireland by the Central Bank of Ireland currently are:
Allied Irish Banks plc Permanent TSB Bank of Ireland Ulster Bank Ireland DAC What is leveraged finance?
The Guidance states that each credit institution should have a unique and overarching definition of what it regards as a leveraged transaction. Notably, the Guidance does not provide a precise definition, other than to state that a leveraged transaction should meet at least one of the following conditions:
4x test: All types of loan or credit exposure where the borrower's post financing level of leverage exceeds a 'Total Debt to...