April 2018: Joseph Otting, the head of the Office of the Comptroller of the Currency, announced on February 27, 2018 that banks no longer need to adhere to the Leveraged Lending Guidance when providing leveraged financing. Mr. Otting said that “Institutions should have the right to do the leveraged lending they want, as long as they have the capital and personnel to manage that and it doesn’t impact their safety and soundness.”
The Leveraged Lending Guidance was introduced in 2013. The Leveraged Lending Guidance caps pro forma leverage for leveraged financings at 6x and requires that a company be able to amortize at least 50% of its debt within 5-7 years of closing. As a result of the Leveraged Lending Guidance, banks and sponsors were often unable to do certain deals in the face of fears of regulatory criticism of leveraged loans that did not comply with the Leveraged Lending Guidance.
Because of those concerns, the Leveraged Lending Guidance has been under attack for some time. In October 2017, the Government Accountability Office determined that the Guidance was a “rule” that should have been subject to congressional review under the Congressional Review Act before it became effective. The GAO’s determination gave rise to speculation as to whether the Leveraged Lending Guidance was ever and/or still is in effect. While the other banking agencies who promulgated the Leveraged Lending Guidance have not stated that the Leveraged Lending Guidance is of no further effect, Mr. Otting’s remarks do seem to indicate as much.
The regulators’ critical focus on the banks’ leveraged finance business gave a boost to non-regulated lenders, whose share of leveraged finance deals grew significantly as a result of their not being subject to the limitations imposed by the Leveraged Lending Guidance. It remains to be seen whether the OCC’s decision not to enforce the Leveraged Lending Guidance will lead to some reversals in the growth of these non-regulated lenders.