By Gillian Tan
After repeated attempts by U.S. regulators to curb lending for
debt-laden takeovers, Wall Street banks are still taking divergent
views on whether they need to pass on potentially lucrative
deals.
Barclays PLC, Bank of America Corp., Goldman Sachs Group Inc.
and Royal Bank of Canada's RBC Capital Markets have signed up to
provide financing for one of the private-equity bidders vying to
buy Swiss packaging company SIG Combibloc from Reynolds Group
Holdings Ltd., according to people familiar with the matter.
Japan's Nomura Holdings Inc., which isn't subject to the U.S.
regulatory push, also is onboard to finance the bidder, Onex Corp.,
one of the people said.
Citigroup Inc., Credit Suisse Group AG, J.P. Morgan Chase &
Co. and UBS AG, meanwhile, are sitting out the deal on the advice
of their internal monitors, concerned that it would earn them a
black mark from regulators, according to people familiar with the
banks' thinking. Morgan Stanley is also sitting out the deal, other
people said.
At issue is a type of financing used by private-equity firms to
take over corporations that could leave a company with a high level
of debt that it may have trouble repaying.
The divide in the SIG deal highlights how banks differ on how to
interpret guidance meant to rein in risky lending, even after
regulators issued additional clarification this month.
The stakes are high for banks in the SIG deal in a year in which
sizable private-equity buyouts that generate big fees for lenders
have been relatively scarce. The SIG buyout is expected to value
the company at roughly $4.5 billion, according to a person familiar
with the deal. In a deal this size, fees could exceed $75
million.
"Part of the dilemma with these guidelines is that it's almost
impossible to have a 100% agreement on every deal," a senior
leveraged-finance banker said.
After an annual review of major banks' loan portfolios, the
Federal Reserve, the Office of the Comptroller of the Currency and
the Federal Deposit Insurance Corp. on Nov. 7 faulted banks for
"serious deficiencies" in their leveraged-lending businesses and
issued a list of frequently asked questions to clarify the
guidance. The guidance, issued in March 2013, targeted leveraged
lending.
Bankers said they rarely encounter a deal that would clearly
pass muster with regulators.
The SIG deal is expected to leave the company, which makes milk
cartons and juice boxes, among other things, with a debt ratio of
about 6.5 times the company's earnings before interest, taxes,
depreciation and amortization, or Ebitda, according to people
familiar with the deal, which is at a level regulators generally
view as risky.
The OCC has seen deals at that level that are acceptable, an
official said last month, but added that buyouts above six times a
company's Ebitda may attract "additional scrutiny and additional
attention" and raise questions about the company's ability to repay
its debt.
SIG, however, has sufficient cash flow that should enable it to
repay the debt within the time frame preferred by regulators,
according to people familiar with the deal. That has led some banks
to deem it acceptable under their own internal guidelines.
Some banks have resisted regulators' push to curb such loans,
which generate sizable fees, sometimes based on interpretations of
what they called unclear guidance and other times concluding
certain deals could move forward as exceptions. The guidance issued
this month was supposed to make the rules more clear, but some
bankers said they still aren't sure whether regulators will allow
banks a limited number of exceptions, known as "bullets," each
year. Others operate based on the understanding they have no
exceptions.
"While intended to help banks interpret how to comply with the
leveraged-lending guidance, the agencies have again declined to
create any bright lines in the FAQs, leaving continued uncertainty
about how to approach any given deal," said Jim Douglas, head of
U.S. leveraged finance at law firm Freshfields Bruckhaus Deringer
LLP.
The OCC has said it has a "no exceptions" policy on new loans.
The Fed, on the other hand, expects disagreements among banks about
individual deals. It has told the banks it regulates it is willing
to accept such disagreements, so long as the bank is judging loans
using an internal system that meets supervisors' expectations and
that flags deals that fall clearly outside the regulatory guidance
before those transactions get closed, a Fed official said last
month.
The Fed regulates Credit Suisse, UBS, Barclays, Goldman Sachs
and Morgan Stanley in this matter, while the OCC regulates the
national banks housed at Bank of America, Citigroup and J.P.
Morgan, along with RBC.
Big banks have been keeping track of how their rivals are
approaching deals, watching to see if others are willing to put
themselves in the regulators' firing line. Sizing up the
competition with back-of-the envelope tallies of rivals' use of
"bullets" can help them decide whether to attempt to take a bullet
themselves, a complicated process with multiple internal hurdles,
some bankers said.
The leverage-lending guidance appears to be deterring some banks
from taking anything but a lead role on deals that could face
regulatory scrutiny. Banks that don't get lead status are typically
offered less significant roles to compensate them for the expenses
attached to the pursuit of the deal. Some are shunning those
nonlead roles to avoid tripping up the guidance on a deal that
won't be lucrative for them, bankers said, and that could leave
them in the red on some deals.
"Banks going through the process of risk committee want the fee
opportunity to be meaningful and commensurate," said a managing
director at a private-equity firm.
Simon Clark, Ryan Dezember, Mike Spector and Shayndi Raice
contributed to this article.
Write to Gillian Tan at gillian.tan@wsj.com
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