December 14, 2017 - The Leveraged Lending Guidance story line may be accelerating. In March 2017, Senator Toomey (R-PA) asked the Government Accountability Office (“GAO”) whether Leveraged Lending Guidance was a rule under the Congressional Review Act (“CRA”). On October 18, 2017, the GAO responded that it was, in fact, a rule subject to the CRA.  On November 2, 2017, Congressman Leutkemeyer (R-MO) sent a letter to the Federal Reserve, OCC and FDIC reminding them that the GAO determined that the guidance was a rule and therefore that i) the guidance was not in effect because it had not been submitted to Congress and ii) the agencies should not apply the guidance as a rule (such as issuing MRAs or MRIAs).

In the last month, the banking agencies responded to those gentle prods with a series of letters of their own, as reported by Thomson Reuters LPC, Debtwire and the WSJ. Collectively the agencies agreed that guidance should not be construed as rulemaking and they expressed openness to reopening it for comment and refinement.

Press around these letters has tended to ask whether they widen the door for banks to underwrite highly leveraged or non-pass transactions. (While folks point to leverage over 6x to suggest that banks may be underwriting non-pass credits, the regulators have been clear that the more important metric is companies’ ability to repay all their senior debt or half their total debt from base cash flows in five to seven years.)

But importantly, the underwriting standards may not actually be the biggest issue in the leveraged lending guidance.  A number of banks say that the capture of non-leveraged (and investment grade!) loans in the leveraged loan portfolio is more disruptive overall. How big an issue is it? The 2017 SNC Review reported the startling news that banks’ leveraged loan portfolios nearly doubled in one year.  Exhibit 4 on p. 6  shows that the size of SNC Leveraged Lending Commitments soared by $792 billion to $1.76 trillion. The following paragraph explained that near-doubling of the leveraged loan portfolio was primarily due to banks “recalibrating leveraged loan definitions to meet regulatory expectations of committed senior debt above three times EBITDA or committed total debt above four times EBITDA, except in industries or sectors where banks have documented appropriate reasons for other leverage levels”.  In other words, a lot of loans were pulled into the portfolio. This may be the space to watch as we move into 2018.