Carlyle concerned over ECB leverage proposals

The Carlyle Group has raised concerns that leverage rules being considered by the European Central Bank could restrict the availability of credit for funds or portfolio companies.

The firm said the proposals, put forward in November, may make credit institutions reluctant to enter into some leveraged transactions, and increase the costs of credit for those that are able to secure the capital.

Under the draft guidance, credit institutions must have internal policies that include a definition of leveraged transactions. This means they have to define their appetite for underwriting and syndicating transactions, which will include acceptable leverage levels.

Loans or credit exposure should be regarded as leveraged transactions in circumstances including when the borrower is owned by one or more financial sponsors.

“For these purposes a financial sponsor is an investment firm that undertakes private equity investments in and/or leveraged buyouts of companies,” Carlyle said in its 10-K filing.

Under the proposals, underwriting of transactions that have a ratio of total debt to EBITDA of more than 6 times at deal inception is a high level of leverage, and should be exceptional. For most industries, the ECB believes a leverage level in excess of 6 times total debt to EBITDA should raise concerns.

“Credit institutions may be reluctant to enter into a leveraged transaction having a ratio of total debt to EBITDA exceeding 6.0 times absent an extraordinary justification,” Carlyle said.

A consultation on closed in January, and a spokesman for the ECB told pfm the Bank is currently reviewing the comments put forward.

Coming from America

S&P Global Ratings’ Tom Ewing said the ECB’s recommendations are similar to those introduced in the US three years ago, and therefore he doesn’t believe it will have a material impact on leverage levels in the European leveraged finance market.

He added the US guidance, which also said leverage ratios of 6x should remain exceptional, has applied to much of the European market since 2013. But he identified the ECB’s unadjusted definition of EBITDA as more contentious.

“The market bases most structures on adjusted EBITDA and spends considerable time analysing what adjustments are acceptable. It remains to be seen whether this term makes the final guidance,” Tom Ewing, S&P Global Ratings analyst, said.