Don’t get too comfortable.
That’s the message that Robert Villani, partner at law firm Clifford Chance, had for lenders who are taking advantage of the relaxing of regulatory guidelines to underwrite corporate debt packages well above the 6.0 times leverage limit adopted in 2013, under the previous presidential administration.
During a panel discussion at IMN’s ABS East Conference in Miami, Villani noted that regulators could easily change their tune after the next presidential election, or even after the coming midterm congressional elections, if Democrats regain control of the Houses and/or Senate.
While regulators have advised large institutions not to worry about lending guidelines, “We’re finishing up two years of four years of an administration that is regulatory lite,” Villani said. Regulators don’t want to put banks at a disadvantage to nonbank lenders. As a result, there are loans that are being made that exceed the guidelines and banks will continue to make them.
Just be prepared: Should the Democrats return to power, “you know those guidelines, and you can start following them again,” he said.
Unfortunately for both banks and nonbanks, the current regulatory light climate is unlikely to bring much relief for collateralized loan obligations, Villani said. He noted that the Federal Reserve’s proposals to revise the Volcker Rule are not focused on the areas of most concern to CLOs: defining ownership and restrictions on using bonds as collateral. These accounted for just two of the over 1,000 questions on which the central bank is soliciting comment.
(The comment period was recently extended by one month from Sept. 27 to Oct. 17.)
While some may be concerned that lax lending so late in the credit cycle could contribute to rising defaults, Tom Majewski, CEO of Eagle Point Credit Co., sees little to worry about. Overall, he said, revenues and profits at below-investment-grade companies revenues are growing, and the pace of revenue growth coming “at an accelerating rate – that’s good news.”
For investors in the riskiest securities issued by CLOs, known as the equity, the best defense against a turn in the credit cycle is maximizing the weighted average life of deals, he said, reiterating comments made during Eagle Point’s second-quarter earnings conference call.
