New Post has been published on News From Banks | Banking and Investment Blog
New Post has been published on http://www.newsfrombanks.com/trlpc-companies-turn-to-non-banks-to-increase-leverage.html
TRLPC: Companies turn to non-banks to increase leverage
NEW YORK Fri Feb 20, 2015 9:35am EST
NEW YORK Feb 20 (Reuters) – Highly leveraged borrowers looking to bring more debt onto their balance sheets are replacing agent banks with unregulated entities such as Jefferies in order to push leverage higher without raising the ire of regulators.
In the last two months, at least two borrowers – Arctic Glacier and Mitchell International – have turned to Jefferies rather than their respective existing lead arrangers to raise incremental debt.
“The regulated banks are taking a pass on things that are very natural for them to lead. Non-regulated banks are taking their place,” said Richard Farley, a leveraged finance partner at law firm Paul Hastings.
The added debt used to repay outstanding borrowings or provide funding for acquisitions could otherwise be frowned upon by regulators, such as the Federal Reserve or the Office of the Comptroller of the Currency, which are taking a tough line on enforcing leverage guidelines to curb reckless lending.
The leveraged lending guidelines finalized in March 2013 are meant to prevent risk building up in underwriting banks. Regulators view leverage over 6.0x as problematic and also focus on a borrower’s ability to pay off debt within a specific timeframe.
In anticipation of a pullback in bank lending resulting from tighter regulatory scrutiny, non-traditional lenders have positioned themselves as alternative debt capital providers and are angling to grab market share.
Lenders that flaunt the guidelines will have loans “criticized” and potentially face penalties imposed by regulators that are cracking down on assets they are concerned could pose systemic risk.
“Often when doing an add-on or tapping an accordion, Fed and OCC regulated banks – even if they are in the syndicate now – are saying no if lead arranging a new deal will be criticized,” Farley said.
Market participants expect alternative lenders to continue stepping in to provide incremental debt to borrowers where existing bank lenders opt out.
Earlier this month, Jefferies, as sole lead arranger, provided a $ 35 million add-on term loan to packaged ice product maker Arctic Glacier. The loan is fungible with the company’s existing $ 275.8 million first-lien term loan arranged by Credit Suisse, resulting in a combined $ 310.8 million tranche. Credit Suisse originated the loan in 2012 then repriced the deal a year ago.
Proceeds from the incremental debt will repay borrowings under Arctic’s $ 40 million revolver due 2018. The transaction bumped pricing on the entire first-lien tranche to 500bp over Libor from 400bp over Libor, along with a 1 percent Libor floor, while the new money portion sold to investors at a 99 original issue discount.
In a Moody’s credit opinion published in May 2014, the ratings agency said, “The company’s leverage was very high at approximately 8.3x as measured by Moody’s adjusted debt-to-Ebitda without giving effect to the expected contribution from acquisitions and cost savings from actions already implemented. However, pro-forma for acquisition-related benefits yet to be realized, leverage is approximately 7.3x.”
Jefferies is not a commercial bank and was not bailed out in the aftermath of the financial crisis. As a result, the guidelines do not apply to Jefferies, nor to other non-bank lenders, such as business development companies and other direct origination platforms, that are poised to benefit from banks pulling back.
In January, Jefferies also arranged $ 55 million in incremental term debt for Mitchell International, a provider of technology and information services to the property & casualty claims industry, to fund KKR-controlled Mitchell’s purchase of assets from Cogent Works.
KKR Capital Markets was joint lead arranger with Jefferies on the add-on loan. Previously Bank of America Merrill Lynch had arranged a $ 785 million credit for Mitchell in October 2013 that funded KKR’s roughly $ 1.1 billion takeover of the company from Aurora Capital Group.
Jefferies declined to comment. Credit Suisse and Bank of America Merrill Lynch did not immediately return calls for comment. (Editing By Michelle Sierra and Lynn Adler)
