The Fed declined to comment. The FDIC didn’t respond to requests for comment.
In the past, those who pushed too far received a slap down. Goldman Sachs Group Inc. was warned for a debt deal to fund a July 2016 buyout of Ultimate Fighting Championship, as did banks including Credit Suisse Group AG on a 2016 deal to buy BMC Software Inc. Both Goldman Sachs and Credit Suisse declined to comment.
Poses Risks
The surging involvement of shadow banks is eliciting concerns. The Financial Stability Board, an international body, said shadow-banking assets that pose risks to the financial system grew 7.6 percent to $45 trillion in 2016. The Fed suggested in a May 2017 report that because leverage had migrated to the shadow-banking system its guidance failed to reduce risk in the financial system overall.
The recent easing on guidance means the banks can be less fearful of getting slammed by authorities. As a result, a spate of deals with leverage not just above the six-times marker, but in some cases beyond seven times Ebitda, have followed. Such highly levered deals remain on the rare side, at least for now.
“Deals are getting done at leverage levels that regulated banks wouldn’t have done a year ago,” said Richard Farley of law firm Kramer Levin Naftalis & Frankel LLP.
Regulators have remained watchful, Farley said. The six-times ratio was meant to be a yardstick rather than an absolute ceiling, and only one way regulators keep an eye on the market. Other considerations, such as a company’s ability to pay down debt and generate cash flow, remain in place. And when regulated banks sold off loans to non-banks as they often do, those still have to adhere to the same safety and soundness principles.
“The regulators have plenty of tools,” Farley said. “Just because there’s no speed limit on the road doesn’t mean they can’t write you a ticket for reckless driving.”
This article was provided by Bloomberg News.