Potential Opportunity for Certain Non-U.S. Lenders and Private
Since U.S. regulators published the Interagency Guidance on
Leveraged Lending (Guidance), in March 2013, commentators have
speculated on its likely market impact (the guidance is discussed
in detail in an April 2013 Osler
Update). Some have theorized that the Guidance – and in
particular its concern over debt-to-EBITDA or leverage ratios
exceeding 6.0 times – would push leveraged lending away from
U.S.-regulated banks and into the hands of unregulated (or less
regulated) lenders, including private funds and certain foreign
banks. Others have guessed that less regulated products, such as
high-yield bonds, would end up as beneficiaries.
Evidence of the mounting impact of the Guidance surfaced
recently in the form of a decision by several traditional
U.S.-regulated banks (citing the Guidance) to sit out the proposed
US$1-billion LBO by KKR portfolio company Brickman Group Ltd. of
landscaping company ValleyCrest. Moody's estimates that this
transaction would involve leverage at 6.8 times ValleyCrest's
EBITDA, above the 6.0 times indicated in the Guidance as raising
concerns for borrowers in most industries. In light of the
traditional U.S.-regulated banks' decision not to participate,
this transaction is instead expected to be financed by so-called
alternative lenders not subject to the Guidance. These are to be
led by a private U.S. brokerage, and are to include foreign banks
that do not accept U.S. deposits. Particularly interesting is the
fact that many of the traditional U.S.-regulated banks sitting out
the proposed transaction actually financed KKR's LBO of
Brickman itself in 2013, likewise at a reported leverage ratio of
6.8 times Brickman's EBITDA.
While the full impact of the Guidance on the U.S. leveraged
lending market remains to be seen, all indications are that U.S.
regulators intend to enforce the Guidance. This may present
unregulated lenders, such as private funds and certain foreign
banks, with an opportunity to pick up market share in the lucrative
U.S. leveraged loan market.
The British Columbia Court of Appeal has recently considered whether the doctrine of unconscionability can be invoked to set aside a contractual clause providing for the payment by one party to the other...
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