Fed’s dreading deals leverage

The Federal Reserve is becoming more concerned about risks from the leveraged loan market, with a key official saying it’s now taking a “closer look” at whether banks are chasing deals without protecting themselves against losses.

“There may be material loosening of terms and weaknesses in risk management” in the $1.3 trillion market, Todd Vermilyea, the Fed’s head of risk surveillance and data, said Wednesday at an industry conference in New York.

After regulators named by President Trump said they would apply a lighter touch, Morgan Stanley, Goldman Sachs and Credit Suisse joined in deals that exceeded what the Fed previously deemed appropriate.

In 2013, regulators issued tough industry guidance for banks. But when the Government Accountability Office determined last year that the Fed and the Office of the Comptroller of the Currency had overstepped their authority, the regulators agreed they would stop enforcing the guidance.

Last month, 14 regulated banks along with KKR Capital Markets underwrote $6.7 billion of loans and bonds in the buyout of Envision Healthcare, one of the largest deals of the year. That represented a multiple of 6.9 times debt versus earnings.

The 2013 guidance had imposed extra regulatory scrutiny when ratios rose above 6 times earnings.