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Federal R eserve Bank
OF DALLAS
ROBERT
D. M c T E E R , J R .
PRESIDENT
AND CHIEF EX ECUTIVE O F F IC E R
August 1, 1991
DALLAS. TEXAS 75222
Notice 91-67
TO:
The Chief Executive Officer of each
member bank and others concerned in
the Eleventh Federal Reserve District
SUBJECT
Comments on Supervisory D e fin itio n
of Highly Leveraged Transactions
DETAILS
The Federal Reserve Board, the Comptroller of the Currency, and the
Federal Deposit Insurance Corporation have requested public comment on the
supervisory definition of highly leveraged transactions (HLTs). The agencies
are requesting comment in view of questions raised regarding the application
and impact of the HLT definition.
Under the current definition, a bank or bank holding company is
considered to be involved in a highly leveraged transaction when credit is
extended to or an investment is made in a business through a financing
transaction that involves the buyout, acquisition, or recapitalization of an
existing business. In addition, one of the following criteria must be met:
• the transaction results in a 1 iabilities-to-assets
leverage ratio higher than 75 percent;
• the transaction at least doubles the subject com
pany’s liabilities and results in a 1 iabilities-toassets leverage ratio higher than 50 percent; or
• the transaction is designated an HLT by a syndica
tion agent or a federal regulator.
The Board must receive comments by August 26, 1991. Comments should
be addressed to William W. Wiles, Secretary, Board of Governors of the Federal
Reserve System, 20th Street and Constitution Avenue, N.W., Washington, D.C.
20551. All comments should refer to Docket No. R-0734.
ATTACHMENT
Attached is a copy of the Board’s notice as it appears on pages
31464-67, Vol. 56, No. 132, of the Federal Register dated July 10, 1991.
For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas:
Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162,
Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
- 2 -
MORE INFORMATION
For more information, please contact Dan Kirkland at (214) 744-7433.
For additional copies of this Bank’s notice, please contact the Public Affairs
Department at (214) 651-6289.
Sincerely yours,
31464
Federal Register / Vol. 56, No. 132 / W ednesday, July 10, 1991 / Notices
Comments must be submitted on
or before August 26,1991.
ADDRESSES: Comments should be
directed to:
OCC: Communications Division, 250 E
Street, SW., Washington, DC 20219;
attention: Docket No. 91-7. Comments
will be available for public inspection
and photocopying at the same
location.
FDIC: Hoyle L. Robinson, Executive
Secretary, Federal Deposit Insurance
Corporation, 550 17th Street, NW„
Washington, DC 20429; attention:
Docket No. 050984. Comments may be
hand delivered to room F-402,1776 F
Street, NW., Washington, DC, on
business days between 6:30 a.m. and 5
p.m. Comments may also be inspected
in room F-402 between 8:30 a.m. and 5
p.m. on business days. (FAX number:
(202) 898-3838}
Board: Mr. William Wiles, Secretary of
the Board, Board of Governors of the
Federal Reserve System, 20th and
Constitution Avenue, NW.,
Washington, DC 20551; Attention:
Docket No. r-0734 or delivered to
room B-2223, Eccles Building, between
8:45 a.m. and 5:15 p.m. Comments may
be inspected in room B-1122 between
9 a.m. and 5 p-m., except as provided
in § 261.8 of the Board’s Rules
Regarding Availability of Information,
12 CFR 261.8.
d a te s :
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
[Docket No. 91-7}
FEDERAL DEPOSIT INSURANCE
CORPORATION
[Docket No. 050984)
FEDERAL RESERVE SYSTEM
[D ocket No. R -0734]
The Supervisory Definition of HighlyLeveraged Transactions
Office of the Comptroller of
the Currency, Treasury (OCC); Federal
Deposit Insurance Corporation (FDIC);
and Board of Governors of the Federal
Reserve System (Board).
ACTION: Joint request for comment.
a g e n c ie s :
FOR FURTHER INFORMATION CONTACT:
OCC: John W. Turner, National Bank
Examiner (202) 874-5170, Chief
National Bank Examiner’s Office.
FDIC: Garfield Gimber, Examination
Specialist (202) 898-6913, Division of
Supervision.
Board: Todd A. Glissman, Supervisory
Financial Analyst, Division of Banking
Supervision and Regulation, (202) 4523953, and William G. Spaniel, Senior
Financial Analyst, Division of Banking
Supervision and Regulation (202) 4523469.
SUPPLEMENTARY INFORMATION:
SUMMARY: The
three Federal banking
agencies have received questions and
comments regarding the designation,
reporting and delisting of highlyleveraged transactions (HLTs).
Additionally, some borrowers have
indicated that the HLT designation is
viewed as a criticism of credit quality by
analysts, bankers and investors, even
though the HLT designation does not
imply supervisory criticism.
To address these concerns, the
Agencies (OCC, FDIC and Board), are
seeking public comment on all aspects
of the HLT definition and criteria, as
well as comments on specific issues
raised by questions which the Agencies
have received.
Throughout the mid to late 1980s, the
Federal bank regulatory agencies
individually employed supervisory
guidelines and definitions related to
Highly-Leveraged Transactions (HLTs).
These guidelines were issued to provide
procedures to examiners for identifying
and evaluating this type of financing
transaction.
The approach used in these guidelines
was to develop a flexible definition of
HLTs: encourage financial institutions to
establish appropriate internal limits for
risk management purposes; and instruct
examiners to carefully review internal
credit review and monitoring
procedures, as well as the overall risks
associated with HLTs. In June 1989, the
Securities and Exchange Commission
(SEC) issued guidance to all public
companies requiring disclosure of
highly-leveraged transactions in public
financial statements.
Prior to the adoption of a common
definition of HLTs, financial institutions
employed a wide range of definitions.
This lack of consistency complicated the
job of examiners in identifying and
assessing HLT credits, as well as the
important supervisory task of
monitoring the growth trends of HLT
lending. In addition, the lack of a
common definition also made it difficult
for financial institutions to compare
their own performance with that of their
peers.
In October 1989, the Agencies adopted
a common definition of HLTs, The
purpose of this effort w as to establish
consistent procedures among the
Agencies in identifying and assessing
HLTs. The HLT definition by itself has
never implied any supervisory criticism
of individual credits. As with any other
commercial loan, an HLT credit is
subject to examiner criticism only after
a thorough review of the borrower’s
financial condition, income, and cash
flow; the value of any collateral or
guarantees; the quality and continuity of
the borrower’s management and the
borrower’s ability to service its debt
obligations.
Implementation of the HLT definition
by examiners and use of the definition
by financial institutions as the basis for
making HLT disclosures gave rise to
several questions regarding the breadth
and content of the definition. In
response to these questions, the
agencies issued guidance to examiners
in February of 1990 and in February of
1991. Among other things, this guidance
(1) exempted from the HLT designation
loans to small- and medium-sized
businesses through the application of a
$20 million de minimis exception; (2)
exempted companies where only a small
portion of total debt was HLT related;
(3) broadened the criteria for removing
(delisting) loans from HLT status; (4)
excluded from the definition certain
credits that were not intended to be
deemed HLTs; and (5) clarified other
provisions of the definition.
In September 1990, the Board began
collecting HLT data on the Consolidated
Financial Statements for Bank Holding
Companies (F.R. Y-9C). Prior to
collecting this data, the Board sought
public comment on the HLT definition
and interpretive guidance, as part of
revisions to reporting requirements. (The
notice was published in the Federal
Register on April 6 , 1990, 55 FR 12894.)
Subsequently, the Agencies began
Federal Register / Vol. 56, No. 132 / Wednesday, July 10, 1991 / Notices
collecting HLT data in Reports of
Condition and Income, completed by
banks beginning in March 1991. Prior to
implementation of revisions to these
reports, comment was sought on the
HLT definition and interpretive
guidance from banking industry
associations and from the public. (A
notice was published in the Federal
Register on December 26,1990, 55 FR
53049.) Most of the comments received
in connection with these report revisions
came from the banking industry.
Recently, the Agencies have received
additional questions and comments
regarding HLTs. These comments, many
of which have come from borrow ers and
specific industry groups, have focused
on five areas:
(1) The possible use of a cash flow
criterion in the definition of HLTs;
(2) The specific criteria for removing
loans from HLT status;
(3) The treatment of highly-leveraged
firms with investment-grade debt
ratings;
(4) The application of the HLT
definition to parent companies and their
subsidiaries; and
(5) The level of flexibility and
judgement allowed to bank management
by the HLT definition.
The supervisory definition of HLTs
has played an important role in helping
the Agencies identify these credits and
monitor the exposure of financial
institutions over time. In addition, the
development of the definition, together
with the SEC disclosure requirements,
has encouraged financial institutions to
focus attention on the need for internal
control and review mechanisms, and on
the need to structure HLT credits in a
way that is consistent with the risks
involved. At the same time, the
Agencies do not want questions or
misunderstandings about the
supervisory definition of HLTs to have
an adverse impact on the availability of
credit to sound borrowers. In this
regard, and in view of the questions that
have been raised, the Agencies ate
seeking public comment on ways to
mprove the identification of HLT
credits. This request for comment will
give an opportunity to borrowers and
industry groups, as well as an additional
opportunity to financial institutions, to
comment on the supervisory definition.
The agencies are seeking comment on
the specific topics summarized below as
well as all aspects of the definition
which follows;
1. Cash Flow Criteria and Guidelines
The Agencies seek comments on the
use of a standardized cash flow criterion
in conjunction with designating and
delisting HLTs. Of particular interest
would be comments on:
(a) The use of a standardized cash
flow analysis;
(b) Minimum debt service coverage
ratios;
(c) The assumptions of these analyses;
(d) Methods to review the
appropriateness of cash flow models;
(e) The relationship of cash flows to
the overall leverage ratio of an
organization; and
(f) Whether or not a single, non
industry-specific cash flow criterion
could be developed.
2. Delisting Criteria
Several questions regarding the
delisting criteria have been raised.
Comment is being sought on:
(a) The appropriate historical time
frame for reviewing an organization’s
ability to operate successfully at high
levels of leverage,
(b) The appropriate time frame(s) for
delisting,
(c) The pertinent economic and
financial data required for delisting, and
(d) Other potential delisting criteria.
3. HLT Designations or Organizations
with Investment-Grade Debt
Some organizations have questioned
the appropriateness and consistency of
an organization with investment-grade
debt being identified as an HLT.
Reasons for not exempting companies
with investment-grade credit ratings
from the HLT definition include:
(1) The HLT designation w as never
intended to convey credit quality
information or criticism, and
(2) Credit ratings can quickly
deteriorate under the burden of heavy
debt. The Agencies seek comment on:
(a) The number of HLT borrowers
with investment-grade debt ratings;
(b) The effects of the HLT designation
on organizations with investment-grade
debt; and
(c) The desirability of introducing a
credit quality criterion into the HLT
definition.
31465
having HLT subsidiaries designated as
“stand-alone" entities rather than
consolidating the HLT with its parent or
other subsidiaries for reporting
purposes. The Agencies seek comment
on:
(a) Potential guidelines for designating
subsidiaries as “stand-alone” entities,
and
(b] The current effects of the
consolidation criteria on the pricing,
structure and availability of credit.
5. Definitional Flexibility
Some questions have been raised
regarding the degree of flexibility and
judgment that may be exercised by bank
management in designating credits as
HLTs. In this regard, comment is
requested on whether the supervisory
definition of HLTs should be eliminated
and, instead, allow management to
designate HLTs based upon the bank's
own internal loan review and
categorization systems. This approach
would be subject to examiner or
supervisory review during on-site
examinations in order to ensure that the
definition used meets supervisory needs
and to encourage an element of
consistency among banks. Such an
approach would provide a measure of
flexibility for management to take
account of a wide range of factors,
including cash flow, in designating
credits as HLTs. The Agencies seek
comment on whether this approach
would result in individual banks giving
different designations to the same
credits, or employing different criteria,
based upon differences in their internal
loan evaluation and assessment
systems. Comment is also sought on
whether this would lead to inconsistent
treatment among banks or complicate
supervisory risk assessments of the
impact of HLT lending.
Appendix
4. Subsidiary HLTs and Their Effects on
Consolidated Organizations
Definition and Guidance Regarding HighlyLeveraged Transactions {“HLTs”).
Following is a consolidated version of the
current guidance on HLTs. This appendix
reflects all previous guidance issued by the
three federal banking agencies.
The Agencies have received questions
regarding the application of the
definition to subsidiaries and their
parent organizations. The HLT
guidelines require that if a company
meets the HLT criteria on a consolidated
basis, then all debt to the organization is
designated as HLT debt. A subsidiary,
however, that meets the HLT criteria,
but that does not cause the consolidated
organization to meet the HLT criteria,
may stand alone as an HLT. The
questions received have focused on
Summary o f Definition
A bank or bank holding company is
considered to be involved in a highlyleveraged transaction when credit is
extended to or investment is made in a
business where the financing transaction
involves the buyout, acquisition, or
recapitalization of an existing business and
one of the following criteria is met:
(a) The transaction results in a liabilities
to-assets leverage ratio higher than 75
percent; or
(b) The transaction at least doubles the
subject company's liabilities and results in a
31466
Federal Register / Vol. 56, No. 132 / W ednesday, July 10, 1991 / Notices
liabilities-to-assets leverage ratio higher than
50 percent; or
(c) The transaction is designated an HLT
by a syndication agent or a federal bank
regulator.
Additional Guidance on the Definition o f
HLTs
A highly-leveraged transaction is a type of
financing which involves the restructuring of
an ongoing business concern financed
primarily with debt. The purpose of an
individual credit is most important when
initially determining HLT status. Once an
individual credit is designated as an HLT, all
currently outstanding and future obligations
of the same borrower are also included in
HLT totals. This includes working capital
loans and other ordinary credits, until such
time as the borrower is delisted.
The regulatory purpose of the HLT
definition is to provide a consistent means of
aggregating and monitoring this type of
financing transaction. It must be pointed out
that the HLT designation does not imply a
supervisory criticism of a credit. Before any
HLT or any other credit is criticized, an
examiner should review a whole range of
factors on a credit-by-credit basis. These
factors include cash flow, general ability to
pay interest and principal on outstanding
debt, economic conditions and trends, the
borrower's future prospects, the quality and
continuity of the borrower's management,
and the lender’s collateral position.
Participation of banking organizations in
highly-leveraged transactions is not
considered inappropriate so long as it is
conducted in a sound and prudent manner,
including the maintenance of adequate
capital and loan loss reserves to support the
risks associated with these transactions.
Borrowers having questions regarding the
HLT definition should first refer these
questions to their bankers. Bankers should
then refer questions they cannot answer to
the bank's primary federal regulator.
Purpose Test
To become eligible for designation as an
HLT, a financing transaction must involve the
buyout, acquisition, or recapitalization of an
existing business, domestic or foreign. This
definition encompasses traditional leveraged
buyouts, management buyouts, corporate
mergers and acquisitions, and significant
stock buybacks. Leveraged Employee Stock
Option Plans (ESOPs) are also included when
used to acquire or recapitalize an existing
business.
For purposes of satisfying the HLT purpose
test, a leveraged recapitalization involves a
replacement of equity with debt on a
company’s balance sheet by means of a stock
repurchase or dividend payout. Refinancing
existing debt in a company is not deemed to
be a leveraged recapitalization.
Exclusions from the HLT Definition:
Single Asset or Lease: This purchase test
excludes the acquisition or recapitalization of
a single asset or lease (for e.g., a large
commercial building or an aircraft), or a shell
company formed to hold a single asset or
lease, from the HLT definition. Although such
an acquisition may be highly-leveraged, the
asset or lease, in and of itself, is not
considered an ongoing business concern and,
therefore, is not intended to be included in
the HLT category. However, the acquisition
or recapitalization of a leasing corporation
which invests in fleets of equipment for
leasing, or a building company which invests
in real estate projects would satisfy the HLT
purpose test.
De Minimis Test: Loans and exposures to
any obligor in which the total financing
package, including all obligations held by all
participants, does not exceed $20 million, at
the time of origination, may be excluded from
HLT designation. Nonetheless, there may be
some banking organizations that in the
aggregate have significant exposure to
transactions below the de minimis level. It is
expected that those organizations would
continue to monitor closely these
transactions as part of their aggregate HLT
exposures.
Historical Cutoff Date: An HLT transaction
not included in the Shared National Credit
Program, that meets or exceeds the $20
million test, may be excluded from HLT
designation if it originated prior to January 1,
1987, the original terms and conditions of the
credit are materially unchanged, the credit
has not been criticized by examiners, and the
financial condition of the debtor has not
deteriorated.
Debtor-in-Possession Financings: Courtapproved debtor-in-possession (or trustee-inpossession) financing for a business concern
in Chapter 11 reorganization proceedings will
generally be exempt from HLT designation.
All prepetition debt of an HLT borrower and
any post-reorganization debt (after a
company emerges from chapter 11
bankruptcy) will continue to be included in
HLT exposure until delisting occurs.
Leverage Tests
In addition to the purpose test, one of the
following criteria must be met for the
transaction to be considered an HLT:
(1) The transaction at least doubles the
subject company's liabilities and results in a
total liabilities to total assets (leverage) ratio
higher than 50 percent.
Note: The purpose of this leverage test is to
capture transactions in which a company
must suddenly deal with a substantially
higher debt burden. The greatest risk in a
credit exposure is not necessarily the
absolute level of debt but may be the impact
on a company of significant new debt. A key
HLT success factor is ability to handle a
sudden, large increase in debt.
The "doubling of liabilities” is intended to
capture those transactions where new debt is
used to facilitate the buyout, acquisition, or
recapitalization of a business. If the sum of
the acquiring and acquired companies’
liabilities would double as a result of the new
debt taken on to effect the combination of the
companies, then the transaction is considered
an HLT, and all exposure to the company is
designated an HLT. It is not intended to cover
a doubling resulting from the simply addition
of the existing liabilities of the two
companies.
Any refinanced portion of old debt in a
transaction should continue to be treated as
old debt for purposes of applying this
leverage test. Further, if there was no debt in
either company prior to the transaction, then
any new debt will result in a “doubling of
liabilities."
In an acquisition involving one or more
operating divisions of a company (as opposed
to stand-alone subsidiaries), existing
liabilities of the seller associated with
specific operating assets being transferred in
the transaction may be allocated to the
resulting company for purposes of applying
the ‘‘doubling of liabilities” test. The burden
of proof is on the resulting company and its
financial institution(s) to substantiate that the
allocation of the seller’s liabilities to the
resulting company is appropriate.
When calculating a company’s leverage for
the purpose of this test, captive finance
company subsidiaries and subsidiary
depository institutions should be excluded
from the consolidated organization.
(2) The transaction results in a total
liabilities to total assets (leverage) ratio
higher than 75 percent.
Note: When a company’s leverage ratio
exceeds 75 percent, the determination of
whether exposure to the company is
designated an HLT further depends on the
composition of the company’s total liabilities
after the transaction. If a significant portion
of the liabilities (generally 25 percent or more
of total liabilities) derives from buyouts,
acquisitions, or recapitalizations, either past
or present, then all exposure to the company
is designated an HLT. If, after the
transaction, debt related to buyouts,
acquisitions, or recapitalizations, either past
or present, represents less than 25 percent of
total liabilities, then the exposure to the
company need not be designated an HLT.
Again, when calculating a company's
leverage for the purpose of this test, captive
finance company subsidiaries and subsidiary
depository institutions should be excluded
from the consolidated organization.
(3) The transaction is designated an HLT
by a syndication agent.
In specific cases, the bank supervisory
agencies may also designate a transaction as
an HLT even if it does not meet the
conditions outlined above. (It is anticipated
that this would be done infrequently and only
in material cases.)
Definition o f the Leverage Ratio
The leverage ratio is total liabilities
divided by total assets. Total assets of the
resulting enterprise include intangible assets
(such as goodwill). Total liabilities include all
forms of debt (including any new debt taken
on to facilitate the transaction) and claims,
including all subordinated debt and nonperpetual preferred stock. Perpetual preferred
stock is generally considered equity for
purposes of calculating HLT leverage.
However, exceptions could be made on a
case-by-case basis if the stock has
characteristics more akin to debt than equity.
Off-balance sheet exposure, including
claims related to foreign exchange contracts,
interest rate swaps, and other risk protection
or cash management products may normally
be excluded from HLT exposure as long as
their credit equivalent exposure is small
relative to other types of obligations. (It is
expected, however, that internal management
Federal Register / Vol. 56, No. 132 / W ednesday, July 10, 1991 / Notices
information and control systems be in place
to capture these exposures.)
If a parent company uses “double
leverage” (that is, takes on debt and
downstreams it as equity to a subsidiary) to
assist a subsidiary in an HLT purpose-related
transaction, then the debt at the parent
company will be considered HLT purposerelated debt when calculating leverage for
the company on an consolidated basis.
In an acquisition involving a pure
assumption of debt with no new debt issued,
the transaction is not designated an HLT
unless the resulting company's aggregate
outstanding HLT purpose-related debt (from
all previous transactions) is significant
(generally 25 percent or more of total
liabilities) and the 75 percent leverage test is
satisfied.
Consolidation of HLT Exposure
All credit extended to, or investments
made in an HLT should be aggregated with
any ordinary business loans to, or
investments in, the same obligor.
If a company satisfies the HLT purpose and
leverage tests on a consolidated basis, then a
loan to any part of the organization is
deemed to be an HLT. On the other hand, if
only a subsidiary of a company satisfies the
HLT tests, then the subsidiary could “stand
alone” as an HLT; however, if the
subsidiary’s debt level is significant enough
to cause the consolidated organization to
meet HLT leverage criteria, then all debt of
the entire organization is designated HLT.
Guarantees of Payment
If a parent company supplies an
irrevocable, unconditional guarantee of
payment on behalf of its subsidiary and the
leverage of the consolidated organization
does not meet HLT leverage criteria, then the
subsidiary will generally not be designated
an HLT. On the other hand, if the subsidiary's
leverage is significant enough to cause the
consolidated organization to meet HLT
leverage criteria, then all debt of the entire
organization is accorded HLT status. (NOTE:
Third-party guarantees and guarantees by
related subsidiaries of a company have no
effect on the HLT designation. While these
types of guarantees offer credit enhancement
benefits which will be taken into
consideration during the review of individual
credits by examiners, they generally lack the
stronger bonds of support inherent in the
relationship between a parent and its
subsidiary.)
When a foreign parent company provides
the equivalent of an irrevocable and
unconditional guarantee of payment on
behalf of a subsidiary, the subsidiary's debt
will normally not be designated as HLT debt
as long as the consolidated organization does
not meet HLT leverage criteria and the
following two conditions are met:
(1) Written opinions from legal counsels in
the country of origin and the United States
are provided which state that the equivalent
of a written guarantee of debt repayment
exists when is irrevocable and unconditional;
and
(2) The credit files in the U.S. banking
organizations lending to the subsidiary
contain consolidated financial statements for
the foreign parent stated in U.S. dollars under
U.S. accounting rules .
Agent and Lead Bank Responsibility
To ensure consistent application of the
definition, the agent or lead bank is
responsible for determining whether or not a
transaction qualifies as an HLT. The agent or
lead bank is charged with the timely
notification to participants regarding the
statis of the transaction and of any change in
that status, i.e., designation as an HLT or
delisting as an HLT.
The responsibility of the agent or lead bank
to determine HLT status does not preclude a
participant bank from designating a
transaction as an HLT or relieve a participant
from performing its own credit analysis.
Examiners will review transaction for
compliance with the HLT definition in the
context of the Shared National Credit
Program and during regular on-site
examinations.
Delisting Criteria
HLT exposure of a given borrower may be
removed from HLT status upon satisfying the
general criteria and at least one of the
specific criteria outlined below.
(a) General Criteria—For credits to become
eligible for removal from HLT status, a
company must demonstrate an ability to
operate successfully as a highly-leveraged
company over a period of time. Under normal
circumstances, two years should be sufficient
for the credit to show performance and to
validate the appropriateness of projections.
The banking organization should conduct a
thorough review of the obligor to included, at
a minimum, overall management performance
against the business plan, cash flow
coverages, operating margins, status of asset
sales, if applicable, reduction in leverage, and
industry risk.
(b) Specific Criteria—In addition to these
general criteria, at least one of the following
specific criteria must be met to become
eligible for delisting:
(1) For exposures that were included
because of the 75 percent leverage test,
exposures are eligible for delisting from HLT
status when leverage is reduced below 75
percent, and the company has demonstrated
an ability to continue servicing debt
satisfactorily without undue reliance on
unplanned asset sales.
(2) If two years have passed since a
company's most recent acquisition, buyout, or
recapitalization satisfying the HLT purpose
test, then the borrower’s credits are eligible
for delisting from HLT status if all debt
satisfying the HLT purpose test is repaid in
full, even if the borrower’s total liabilities to
total assets leverage ratio continues to
exceed 75 percent. The refinancing of HLT
purpose-related debt through additional
borrowings does not constitute a repayment
of HLT debt. Rather, the repayment of debt
must occur from cash generated from
operations, planned sales of assets, or a
capital injection.
(3) For exposures that were included
because of the 75 percent leverage test, a
borrower’s credits are eligible for delisting
when the borrower satisfies the general
performance criteria for delisting for at least
31467
4 (four) consecutive years since its last
buyout, acquisition, or recapitalization
involving financing; the company has a
positive net worth; and the company’s
leverage ratio does not significantly exceed
its industry norm. Although this criteria does
not require leverage to be reduced to less
than 75 percent, the borrower must
demonstrate an ability to continue servicing
debt satisfactorily without undue reliance on
unplanned asset sales.
(4) For those purposes that arose under the
"doubling of liabilities to greater than 50
percent" leverage criteria, delisting is
acceptable based upon the general criteria in
(a) above and a demonstrated ability to
satisfactorily continue to service the debt.
It is expected that banks will maintain
records of delisted exposures and reasons for
delisting. After delisting, any significant
changes in the obligor's financial condition
should cause the exposure to be reviewed for
relisting. Records pertaining to delisting and
relisting of HLTs will be reviewed by
examiners in the context of the Shared
National Credit Program and/or regular on
site examinations.
If the HLT is shared, the lead or agent bank
should inform all participants and its
principal regulator of the decision to delist or
relist.
Dated: July 2,1991.
Robert L. Clarke,
Comptroller of the Currency.
Dated: July 3,1991.
Hoyle L. Robinson,
Executive Secretary of the Federal Deposit
Insurance Corporation.
Dated: July 3,1991.
William W. Wiles,
Secretary of the Board of Go vernors of the
Federal Reserve System.
[FR Doc. 91-16342 Filed 7-9-91: 8:45 am]
BILLING CODE 4810-33-M
BILLING CODE 6714-01-M
BILLING CODE 6210-01-M
@FedFRASER