ECB botches leveraged finance guidelines

There are about three months to go before the ECB’s guidelines on leveraged transactions come into force. Billed as a way of bringing a regulatory level playing field to an asset class already subject to similar guidance in the US, the reality is that the European iteration is even more mired in confusion than that on the other side of the Atlantic. The verdict of one levfin lawyer? “Bonkers.”

The key points at issue are pretty fundamental, not least the definition of leverage. As they stand, the guidelines appear in the view of levfin bankers and lawyers to include most revolving capital facilities (RCFs), meaning that these must be treated as entirely drawn. Committed capex facilities likewise appear to fall under the scope, despite the fact that such facilities would ordinarily be used to create Ebitda that ought in theory to offset them. One area where the ECB relented from its original draft guidance was in the definition of Ebitda itself, where it now allows adjusted Ebitda to be used, as is typical in calculating leverage for the purposes of structuring levfin deals. But while an exception for high yield bonds is also at first glance welcome (and mirrors the US guidance), it’s largely meaningless for leveraged buyouts since any bridge financing would fall within the scope of the guidance.

The ECB’s guidelines are not law, but they are expected to be followed by regulated institutions. Anyone choosing to ignore them is likely to find their lives a little more uncomfortable. And the question of whether the US equivalent is a rule or guidance could yet make the ECB look a little more foolish.

Earlier this year, Republican Senator Pat Toomey asked for a determination from the Government Accountability Office on whether the US Leveraged Lending Guidance in fact constitutes a Rule. If it does, then it needs approval from Congress to survive. In the current climate, getting that would be quite some achievement. Failure to do so could see it disappear altogether, leaving the ECB’s “harmonisation” motivation looking less sturdy, to say the least.

Senator Toomey is still waiting for his answer. But the recent US Treasury white paper on regulatory reform recommended that in any case the guidance be reissued for comment and then refined to remove areas of uncertainty. The results of that might spur the ECB into tidying up its own lack of clarity, but Europe’s levfin bankers shouldn’t hold their breath. Anyone hoping for an unambiguous stance might have a while to wait.