ECB consultation on draft guidance for leveraged lending transactions: following in the footsteps of the U.S.?

On 23 November 2016, the European Central Bank launched a consultation regarding draft guidance it is proposing to release for leveraged lending transactions. The ECB Guidance aims to address matters identified in a survey of the leveraged lending activities of a number of credit institutions undertaken by the ECB in 2015. The survey found there has been a weakening in leveraged transaction structures as a result of favourable borrower conditions resulting in increased leverage levels and covenant-lite terms, together with discrepancies in the approach to defining, measuring and monitoring leveraged transactions. The ECB Guidance seeks to address these concerns by establishing guidelines on how credit institutions measure and monitor their exposure to leveraged lending transactions. The consultation closes on 27 January 2017 following which the ECB will publish all comments it has received, together with a feedback statement.

The principles in the ECB Guidance are closely aligned with the final joint guidance on leveraged lending issued by the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation in the U.S. in March 2013. Similar to the U.S. Guidance, the ECB Guidance recommends, among other things, that credit institutions put in place a comprehensive definition of leveraged lending, clearly define their strategy and appetite for the underwriting and syndication of leveraged transactions, perform detailed due diligence and ensure, through a credit approval process and regular monitoring, that such transactions meet risk appetite standards.

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