Canada: U.S. Regulators Issue Final Guidance On Leveraged Lending

On March 22, 2013, U.S. regulators, consisting of the Office of the Controller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Federal Reserve) and the Federal Deposit Insurance Corporation (FDIC and, collectively with the OCC and the Federal Reserve, agencies), issued their final interagency guidance on leveraged lending.

The final guidance updates and replaces existing guidance from 2001 and forms the basis of the agencies' supervisory focus and review of supervised financial institutions. These institutions include national banks, federal savings associations and federal branches and agencies supervised by the OCC; state member banks, bank holding companies, S&L holding companies and all other institutions for which the Federal Reserve is the primary federal supervisor; and state nonmember banks, foreign banks having an insured branch, state savings associations and all other institutions for which the FDIC is the primary federal supervisor. Institutions subject to the final guidance include U.S. branches and agencies of foreign banking organizations. The compliance date for the final guidance is May 21, 2013.

The final guidance outlines, for agency-supervised institutions, high-level principles related to safe-and-sound leveraged lending activities, including underwriting considerations, assessing and documenting enterprise value, risk management expectations for credits awaiting distribution, stress testing expectations, pipeline portfolio management and risk management expectations for exposures held by the institution. Although the final guidance was not adopted as a rule, actions taken by a supervised institution inconsistent with the guidance would, at a minimum, be subject to supervisory criticism.

The final guidance does not provide a bright-line definition of leveraged lending, instead urging supervised institutions to ensure that their policies include criteria to define leveraged lending that are appropriate to the institution. However, the final guidance does provide certain common definitions of leveraged lending, including the following:

  • transactions whose proceeds are used for buyouts, acquisitions or capital distributions (e.g., so-called dividend recaps)
  • transactions in which the borrower's total debt/EBITDA exceeds 4 to 1 or senior debt/EBITDA exceeds 3 to 1 (in each case measuring debt on a gross basis rather than net of cash on hand)

Importantly, the final guidance does not consider asset-based loans (ABL) to be leveraged loans unless such loans are part of the entire debt structure of a leveraged obligor. In addition, the final guidance does not consider so-called fallen angels (loans that do not meet the definition of leveraged lending at origination, but migrate into that definition at a later date due to changes in the borrower's financial condition) to be leveraged loans, on the basis that a loan should be designated as leveraged only at the time of origination, modification, extension or refinancing. Loans to investment grade borrowers were not categorically excluded in the final guidance from being leveraged loans. The final guidance does, however, indicate that its references to leveraged lending and leveraged loan transactions do not include "bond and high-yield debt."

Some highlights of the final guidance include the following:

  • Each institution should establish its own leveraged loan definition and measure based on the institution's business lines, but the EBITDA-based measure of leverage presented in the final guidance1 represents "the supervisory measure that may be used as an important factor to be considered in defining leveraged loans based on each institution's credit products and characteristics." The agencies believe that having a consistent definition for supervisory purposes will help to ensure a consistent application of the guidance.
  • As a general guide, base case cash flow projections should show the ability to fully amortize senior secured debt, and repay a significant portion (supervisors commonly assume 50%) of total debt, over the medium term (five to seven years is commonly assumed by supervisors).
  • Covenant-lite and PIK-toggle loan structures "may have a place in the overall leveraged lending product set"; however, the agencies will closely review such loans as part of the overall credit evaluation of an institution.
  • Institutions looking to rely on sponsor support as a secondary source of repayment for a leveraged loan (e.g., under a guarantee) should be able to provide documentation, including financial or liquidity statements, showing recently documented evidence of the sponsor's willingness and ability to support the credit extension.2
  • Generally, a leverage level after planned asset sales (that is, the amount of debt that must be serviced from operating cash flow) in excess of 6 times total debt/EBITDA will raise supervisory concerns for most industries.
  • If the primary source of repayment (e.g., operating cash flows) becomes inadequate, the agencies believe that it would generally be inappropriate for an institution to consider enterprise value as a secondary source of repayment unless that value is well supported (evidence of well-supported value may include binding purchase and sale agreements with qualified third parties or thorough asset valuations that fully consider the effect of the borrower's distressed circumstances and potential changes in business and market conditions).
  • An institution should develop appropriate policies and procedures relating to potential conflicts of interest, such as when it has both equity and lending positions or when the institution serves as financial advisor to the seller and simultaneously offers financing to multiple buyers (that is, stapled financing).3

Importantly, the final guidance omits reference to financial institutions having fiduciary responsibilities to loan participants when underwriting and syndicating leveraged loans. The earlier proposed version of the guidance had asserted the existence of such a duty, but in the final guidance, the agencies agree with industry comments that no such duty exists.


1.  This is a cash flow measure, in contrast to, for example, total debt to tangible net worth, which is a balance sheet measure of leverage used by some smaller banks.

2. This represents a softening of the position in the earlier proposed version of the leveraged lending guidance, which would have imposed sponsor diligence and reporting obligations even where (as is the case in many LBOs) the sponsor is not being relied upon as a secondary source of repayment.

3. The long-standing practice of stapled financing has recently been criticized in court cases, including by the Delaware Court of Chancery in a 2011 stockholders' derivative lawsuit associated with the proposed LBO of Del Monte Corporation. More recently, in connection with the proposed Dell LBO, press reports have indicated that at least one major financial institution has declined to offer stapled financing following such criticism. See "Dell Deal Done Differently – J.P. Morgan Doesn't Try 'Staple Financing' After Court Criticized the Practice," Wall Street Journal, January 24, 2013.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions