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FEDERAL RESERVE BANK
OF NEW YORK
Circular No. 10469 "1
July 12, 1991
[
DEFINITION OF HIGHLY-LEVERAGED TRANSACTIONS
Comment Invited by August 26
To All Depository Institutions, and Others
Concerned, in the Second Federal Reserve District:
The Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Board
of Governors o f the Federal Reserve System have jointly issued a request for comment, by August
26, 1991 , on the supervisory definition of highly-leveraged transactions (HLTs). Following is the
text of the announcement by the Federal Reserve Board:
The Federal Reserve Board, along with the Comptroller of the Currency and the Federal Deposit
Insurance Corporation, has issued a request for public comment on the supervisory definition of highlyleveraged transactions (HLTs).
Comments must be submitted by August 26, 1991.
Federal banking regulators established a common definition of HLTs in October 1989 to provide
a consistent means of aggregating and monitoring this type of financing transaction. Additional inter
pretive guidance was provided by the agencies in February 1990 and February 1991.
Under the 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:
• the transaction results in a liabilities-to-assets leverage ratio higher than 75 percent, or
• the transaction at least doubles the subject company’s liabilities and results in a liabilities-to-assets
leverage ratio higher than 50 percent, or
• the transaction is designated an HLT by a syndication agent or a federal regulator.
The agencies are requesting comment in view of questions that have been raised regarding the
application and impact of the HLT definition.
Enclosed — for depository institution in this District — is the text of the official notice on
this matter, as submitted for publication in the Federal Register. Additional, single copies may be
obtained at the Bank (33 Liberty Street) from the Issues Division on the first floor, or by calling
the Circulars Division (Tel. No. 212-720-5215 or 5216). Comments thereon should be submitted
by August 26 and may be sent to the agencies, as specified in the notice, or, at this Bank, to
Kathleen A. O ’Neil, Vice President.
E. G er a l d C o r r ig a n ,
President.
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
[DOCKET NO. R-0734]
The Supervisory Definition of
Highly-Leveraged Transactions
AGENCIES:
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.
SUMMARY: The three federal banking agencies have received
questions and comments regarding the designation, reporting and
delisting of highly-leveraged 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.
DATES: Comments must be submitted on or before August 26, 1991
[Enc. Cir. No. 10469]
2
ADDRESSES: Comments should be directed to:
OCC:
Communications Division, 250 E Street, S.W., Washington,
D.C.
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, N.W., Washington, D.C.
20429; Attention:
Docket No. 050984.
Comments may be hand
delivered to Room F-402, 1776 F Street, N.W., Washington, D.C.,
on business days between 8:30 a.m. and 5 p.m.
Comments may also
be inspected in Room F-402 between 8:30 a.m. and 5:00 p.m. on
business days.
Board:
[FAX number:
(202) 898-3838]
Mr. William Wiles, Secretary of the Board, Board of
Governors of the Federal Reserve System, 20th and Constitution
Avenue, N.W., Washington, D.C.
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 9:00 a.m. and 5:00 p.m., except as provided in Sec 261.8
of the Board's Rules Regarding Availability of Information,
12 CFR 261.8.
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,
-
3 -
Chief National Bank Examiner's Office.
FDICs
Garfield Gimber, Examination Specialist,
(202) 898-6913,
Division of Supervision.
Board:
Todd A. Glissman, Supervisory Financial Analyst, Division
of Banking Supervision and Regulation,
(202) 452-3953, and
William G. Spaniel, Senior Financial Analyst, Division of Banking
Supervision and Regulation,
(202) 452-3469.
SUPPLEMENTARY INFORMATION:
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.
4 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 was 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
5
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 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 borrowers 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
6
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 are
seeking public comment on ways to improve 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:
of a standardized cash flow analysis?
a) the use
b) minimum debt service
- 7
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 industryspecific 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 Designation of 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 was 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 investmentgrade 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.
- 8
4.
Subsidiary HLTs and Their Effects on Consolidated
Organizations
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 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 judgement 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
9
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 vide 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
Definition and Guidance Regarding Highly-Leveraged Transactions
("HLTs1*).
Following is a consolidated version of the current
guidance on HLTs. This appendix reflects all previous
guidance issued by the three federal banking agencies.
Summary of Definition
A bank or bank holding company is considered to be involved
in a highly-leveraged 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? qjz
(b) the transaction at least doubles the subject company's
liabilities and results in a liabilities-to-assets leverage
ratio higher than 50 percent? q z
(c) the transaction is designated an HLT by a syndication
agent or a federal bank regulator.
10
Additional Guidance on the Definition of 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.
11
Exclusions from the HLT Definition;
Single Asset or Leases This purpose 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: Court-approved debtor-inpossession (or trustee-in-possession) financing for a
business concern in Chapter 11 reorganization proceedings
will generally be exempt from HLT designation.
All pre
petition 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.
12
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 simple 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%, 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% 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,
13 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.
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 of 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
non-perpetual 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 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 purpose-related debt
when calculating leverage for the company on a 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 purposerelated debt (from all previous transactions) is significant
(generally 25 percent or more of total liabilities) and the 75
percent leverage test is satisfied.
- 14
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 anv 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 an 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 which 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.
15
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 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 a 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 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, at least one of the following specific criteria
must be met to become eligible for delistings
(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
16
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
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 exposures 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.
July 2, 1991
Date
July 2, 1991
Date
July 3, 1991
Date
(signed) Robert L. Clarke
Robert L. Clarke
Comptroller of the Currency
(signed) Hoyle L. Robinson
Hoyle L. Robinson
Executive Secretary of the
Federal Deposit Insurance Corporation
(signed) William W. Wiles
William W. Wiles
Secretary of the
Board of Governors of the Federal Reserve System
@FedFRASER