May 01, 2013Daily Rates & Viewpoints From the Officers & Staff of TIB.

Leverage Lending Guidance

A joint press release (OCC, FDIC, and the Board of Governors) was issued on March 21 discussing the Updated Leverage Lending Guidance. The release synopsizes the key criteria the agencies deem necessary for an institution to establish a sound risk-management framework to deal with Leveraged Lending. The release stipulates that leveraged lending is an important type of financing for national and global economies and the US financial industry plays an integral role in making credit available and syndicating that credit to investors.

The release also states that the average dollar size of leveraged loans exceeds $50,000,000 and tends to be held primarily by very large or global financial institutions. While there are many definitions of a “leveraged loan”, the agencies state they commonly contain some combination of the following:
 
Proceeds are used for buyouts, acquisitions, or capital distributions.
 
Transactions where the borrower’s Total Debt divided by EBITDA or senior debt divided by EBITDA exceed 4.0X EBITDA or 3.0X EBITDA, respectively, or other defined levels appropriate to the industry or sector.
 
A borrower recognized in the debt markets as a highly leveraged firm, which is characterized by a high debt to net worth ratio.
 
Transactions when the borrower’s post-financing leverage, as measured by its leverage ratios, significantly exceeds industry norms or historical levels.
 
The final sentences of the release reads: “This guidance applies to financial institutions supervisedby the agencies that engage in leveraged lending activities. The number of community banks with substantial involvement in leveraged lending is small and they should be largely unaffected by this guidance.”
 
Fact is, no financial institution is excluded from application of this guidance. That said, the vast majority of TIB customer banks would probably see exposure to “leveraged loans” only through a participation purchased from a mega-bank or a national broker. Hopefully, we are all cognizant of the need to obtain complete financials and loan documents and then conduct our own independent underwriting process. If a purchased participation is identified during an examination as a “leveraged lending” transaction, it could trigger requirements under this guidance. These would require you provide your own definition of “leveraged lending” and create a policy to govern it. That policy would include everything from defined underwriting standards to reputational risk. Complete details of those requirements are found in the guidance, which you can access on the web site of your primary regulator. While most of us won’t see a “leveraged lending” transaction, it is always prudent to know what one might smell like in case you do. If you haven’t already reviewed the guidance update, it’s a good idea to do so-it’s only 46 pages.  


Barry Musgrove Barry Musgrove
Sr. Vice President - Lending
bmusgrove@mybankersbank.com

Market Levels @ 7:26 AM CDT

TIB Fed Funds & MMDA Rates - Previous Day
Agent 0.20% Prin 0.05% MMDA 0.30%
STAR Prin 0.10% STAR MMDA 0.35%
Key Indices/Commodities
1 - Month LIBOR 0.19% Dow Jones 14839.80
3 - Month LIBOR 0.27% NASDAQ 100 3328.79
1-Yr LIBOR 0.70% S&P 500 1592.60
1-Yr CMT 0.11% Spot Gold 1469.50
Prime 3.25% Spot Silver 23.87
3-yr LIBOR Swap/Offer 0.44% Spot Crude Oil 92.11
5-yr LIBOR Swap/Offer 0.82% CRB Index 286.45
3 Mo - Fed Fund Futures 0.12% 6 Mo - Fed Fund Futures 0.12%
US Treasury Yields US Non-Callable Agency Yields
Yield Maturity Yield Spread
0.00% 90 - Days    
0.00% 180 - Days    
0.15% 2 - Year 0.24% 9bp
0.26% 3 - Year 0.31% 5bp
0.63% 5 - Year 0.78% 15bp
1.62% 10 - Year 2.00% 38bp
2.83% 30 - Year    
147 BPs Yield Curve(2's-10's)
Sample 1x Callable Agency Issues
Description Call Date YTC YTM
FHLMC 1 11/29/18 5/15 1.01% 1.00%
Select MBS Levels
Description Coupon Yield Spread/Duration*
15-Yr FNMA 3.00% 1.2% 81 / 3.33
30-Yr GNMA 3.50% 1.71% 93 / 5.04
*Duration @ 12 month Historical CPR
Morning Commentary: David Terrell

Equities are down this morning while treasury prices continue to climb.  The catalyst today seems to be the lackluster ADP Employment report coming in at a tepid 119k and construction spending dropping 1.7%.  ISM Manufacturing and ISM Prices Paid both dropped in April to 50.7 and 50.0 respectively.  Anything above 50 indicates expansion, but since reaching a post recession high in February of 2011 of 59.6 it has steadily declined.  Friday will be a big day with the release of unemployment, but that metric has almost become meaningless to me.  Wake me up when Employment starts increasing. 

Information contained herein is based on sources we believe to be reliable but its accuracy is not guaranteed. Customers should rely on their own outside counsel or accounting firm for specific circumstances. The securities, yields or levels discussed herein are for illustration purposes and are not guaranteed, not obligations of any bank, thrift or other entity and are not insured by the FDIC.

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