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F e d e r a lR e s e r v e B a n k


February 20, 1990

To the Chief Executive Officer of all State
Member Banks, Bank Holding Companies, Edge
Corporations, and Foreign Agencies in the
Eleventh Federal Reserve District


Leveraged Buyouts and Related Transactions

In view of questions and comments regarding the recent interagency
definition of leveraged buyouts and related transactions (so-called highly
leveraged transactions), the three federal banking agencies are providing
interpretive guidelines to their respective staff for implementing
supervisory definition. In order to keep you informed of these developments, a
copy of the interagency statement is enclosed for your information.
This statement complements and, in certain limited respects, modifies
the Federal Reserve's existing
supervisory guidelines which were
February 16, 1989, and October 25, 1989, copies of which are available by
contacting the Supervision and Regulation Department at (214) 744-7486.
you have any questions regarding this matter, please contact Marion White or Dan
Kirkland at (214) 744-7490 or 744-7433, respectively.
Very truly yours


This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (

Comptroller of the Currency
Federal Deposit Insurance Corporation
Federal Reserve Board
February 6 , 1990
The Federal bank regulatory agencies have received a number of
comments and inquiries regarding the recently adopted interagency
definition of Highly Leveraged Transactions (HLTs). Most of the
comments pertain to the points discussed below. The following
discussion is intended to provide interpretive guidance for
implementation of the HLT definition.

Purpose Test

The intent of the definition is to cover financing transactions
involving the buyout, acquisition, or recapitalization of an existing
business. It was not contemplated that acquisition or
recapitalization of a single asset or lease, or a shell company formed
to hold a single asset or lease, would be considered an HLT. 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 should be included.

De Minimis Test

The preponderance of HLT exposure arises from transactions where the
amount of the original transaction financing package is substantial.
Therefore, the agencies have decided to adopt a $20 million de minimis
test. Loans and exposures to any obligor in which the total original
financing package, including all obligations held by all participants,
does not exceed $20 million, may be excluded from HLT exposures.
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

Historical Cutoff Date

An HLT transaction not included in the Shared National Credit Program,
that meets or exceeds the $20 million de minimis test, may be excluded
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.





Responsibilities of Agent Banks

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 status 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 transactions for compliance with the
HLT definition in the context of the Shared National Credit Program
and during regular on-site examinations.


The 75% Total Liabilities to Total Assets (Leverage) Test

Under the 75% leverage test, the determination of whether the exposure
to a company is designated an HLT depends on the composition of the
company's total liabilities after the transaction. If a significant
portion of the liabilities (generally 25% 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% of total liabilities, then the exposure to the company
need not be designated an HLT.
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.

The 50% Total Liabilities to Total Assets (Leverage) Test

The purpose of this criterion 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.
A "doubling of liabilities" is intended to capture those transactions
where new debt is used to facilitate the buyout, acquisition, or
recapitalization of a business. For example, if Company A acquires
Company B resulting in a leverage ratio exceeding 50% and if their
combined liabilities double as a result of new debt incurred to effect
the combination, this would be an HLT. If liabilities simply double
in dollar amount as a result of the combination, this is not
necessarily 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.





Risk Protection and Cash Management Products

It is recognized that credit exposure arises from claims related to
foreign exchange contracts, interest rate swaps, or other risk
protection or cash management products. Because these are generally
risk protection products, and their credit equivalent exposure is
normally small relative to other types of obligations, these may
normally be excluded from HLT exposure. It is expected, however, that
internal management information and control systems be in place to
capture these exposures.

Delisting Criteria

The agencies recognize that HLTs are dynamic and may change
significantly during their lives. The initial guidelines instructed
examiners to review delisting policies and criteria utilized by
individual banks. The agencies believe that more formal delisting
guidelines would promote consistency.
(a) General Criteria — Before an HLT may no longer be listed as
such, 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 organization should conduct a thorough review of
the obligor to include, 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,
the following will apply:
(1) For exposures that were included because of the 75%
leverage test, leverage must be reduced below 75% and the
company must have a demonstrated ability to continue
servicing debt satisfactorily without undue reliance on
unplanned asset sales.
(2) For those exposures that arose under the "doubling of
liabilities to greater than 50%" 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





Regulatory Intent

This interpretive document is intended to clarify the regulatory HLT
definition. The agencies recognize the complexities of establishing
such a definition, but believe its use will provide an effective and
more consistent basis for comparison among banking organizations. It
is anticipated that the vast majority of transaction dollars will be
captured and reviewed under the interagency Shared National Credit
Program, which will help ensure consistent treatment.

Dean S . Marriott
Senior Deputy Comptroller
Office of the Comptroller of the Currency

William Tayoor, Staff Director
Division of Banking Supervision and Regulation
Federal Reserve System

Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102