More than five months ago, the Federal Reserve and Office of the Comptroller of the Currency (OCC) told some of the biggest banks to improve underwriting standards for non-investment-grade loans. The market is showing few signs of tightening as lenders chase lucrative fees.
Banks are arranging junk-rated deals that leave companies with debt levels exceeding guidelines set by regulators. Among them: the $1.7 billion of loans led by UBS AG and Deutsche Bank AG last month to finance KKR & Co.’s purchase of a majority stake in Sedgwick Claims Management Services Inc., and the $700 million loan Credit Suisse Group AG arranged in January for Applied Systems Inc., a maker of software for insurance companies.
The exclusion of “meaningful maintenance covenants” is a sign that “prudent underwriting practices have deteriorated,” the Fed, OCC, and Federal Deposit Insurance Corp. (FDIC) said in a March 21 statement accompanying the release of their underwriting guidelines.
The advisory said debt levels of more than six times earnings before interest, taxes, depreciation, and amortization, or Ebitda, “raises concerns.” Underwriting standards should also consider a borrower’s ability to repay and “delever to a sustainable level within a reasonable period,” the regulators said.
Brickman’s B2 rating—five levels below investment-grade—reflects the company’s debt-to-Ebitda of 6.8 times, “low profitability and weak interest-coverage metrics, relatively small revenue size, and limited business diversity,” Moody’s said in a Dec. 3 report. Morgan Stanley, Credit Suisse, and Goldman Sachs are among the banks that helped arrange Brickman’s loan.
Rob Julavits, a spokesman for Citigroup, and LaNella Hooper-Williams, a spokeswoman for Brickman, declined to comment.