The FDIC Fall 2019 edition of Supervisory Insights contained an article entitled “Leveraged Lending: Evolution, Growth and Heightened Risk”.
In the article, the FDIC noted that the credit agreement terms have continued to weaken since 2016.
Examples of the loosening of terms within credit agreements in recent years highlighted by the FDIC include:
- Allowing borrowers to obtain additional debt without the current lender’s approval
- Reducing the utilization of financial maintenance covenants
- Allowing borrowers to sell and purchase assets in the normal course of operations
- Allowing cash to be used for dividends, investments, capital expenditures and other purposes before being included in excess cash flow calculations used to determine debt repayment obligations
In the article, the FDIC noted the following factors underlying this trend:
- Heightened demand for leveraged credit
- Non-bank preferences on terms
- Increased reliance on revenue growth or anticipated cost savings to support repayment capacity
- Increased competition for leveraged lending products
- Increasing fees generated by originating such products
The FDIC’s Supervisory Insights article can be found here.
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