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It was not all that long ago when the only one able to get a loan was one who did not need the money...not anymore.  In the wake of the Great Recession, and amid concern of the return of old lending habits, the Fed and the Office of the Comptroller of the Currency ("OCC") issued guidelines last year urging banks to, among other things, refrain from lending money to finance leveraged buy-outs of greater than 6 times EBIDTA.  Despite these guidelines, according to data reported in the May 21, 2014 edition of the Wall Street Journal, 40% of all LBO's through the first 5 months of 2014 were transactions that exceeded this 6% ratio, the highest level since 2007.

 

The rationale behind some of these high-ratio transactions is the belief by the banks that the revenue generated by the businesses will be sufficient for it to service the debt, thereby taking the "risk" out of the deal.  There is also debate as to the proper calculation of EBIDTA in determining whether the 6% ratio was exceeded.  However, until the Fed and the OCC make firm regulations concerning these types of LBO transactions and the repercussions for violating them, there is the perception by some banks that they can do whatever they want.

 

The banks believe they are taking care of business.  The regulators believe it is risky business.  Time will tell who is right.

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