Last month, on February 26, 2015, members of the Office of the Comptroller of the Currency, the Fed, and the FDIC came together to answer questions and provide direction to bankers on implementing the 2013 Interagency Guidance on Leveraged Lending.
In this 90-minute session, the three organizations laid out “examiner red flags,” which the middle-market private equity community ought to be aware of. A sample of these interagency red flags include:
- Total debt/EBITDA ratios greater than 6.0X
- Large-percentage and/or inadequate bank-initiated adjustments, and questionable third-party due diligence, with regards to EBITDA
- Marginal de-leveraging over time (meaningful de-leveraging is only attained late in the 5-7 year time frame)
- Unsupported cost savings and/or synergies
- Lack of stress testing of projections, including an interest rate shock and/or covenant breach
- Credit agreements that:
– Allow material dilution or reduction of assets without lender approval
– Allow changes in the borrower’s capital structure
– Lack covenant protections
- Sponsor history of dividends or distributions soon after underwriting
What is the MOST significant consequence of the “red flags” for our PE community? Take our poll – results will be posted on our blog next week!
See full newsletter here.