FR 4203 (Guidance on Leveraged Lending IFR)

Federal Register / Vol. 77, No. 62 / Friday, March 30, 2012 / Notices
DEPARTMENT OF TRANSPORTATION
Surface Transportation Board
[Docket No. FD 35390]

Affton Terminal Railroad Company—
Operation Exemption1—Affton
Trucking Company
Affton Terminal Railroad Company
(ATRR), a noncarrier, has filed a verified
notice of exemption 2 under 49 CFR
1150.31 to operate, pursuant to an
agreement with Affton Trucking
Company (ATC),3 approximately 2.0
miles of railroad right-of-way and
trackage and transloading facilities in
St. Louis, Mo. (the Line).
According to ATRR, there are no
mileposts associated with the trackage,
which is located at ATC’s transloading
facility in St. Louis. ATRR states that
the trackage is used in conjunction with
interchanging outbound carloads of
grains and related products as well as
plastic pellets and related products with
the Terminal Railroad Association of St.
Louis and BNSF Railway Company and
inbound carloads for transloading into
trucks for final delivery. ATRR also
states that there are plans to phase in
additional trackage that ATRR will
operate.
ATRR asserts that because the
trackage in question will constitute the
entire line of railroad of ATRR, this
trackage is a line of railroad under 49
U.S.C. 10901, rather than spur,
switching or side tracks excepted from
Board operation authority by virtue of
49 U.S.C. 10906.4
The transaction may not be
consummated until April 19, 2012 (30
days after the notice of exemption was
filed).5

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1 This

proceeding originally was captioned as an
‘‘acquisition’’ exemption, but the described
transaction, as clarified, involves only an operating
agreement. The proceeding has been re-captioned
accordingly.
2 ATRR initially filed its verified notice of
exemption on November 25, 2011. On December 16,
2011, ATRR filed a request that its notice of
exemption be held in abeyance until further notice,
which the Board granted by decision served on
December 20, 2011. ATRR filed an amended
verified notice on March 2, 2012, and a letter
supplementing and clarifying its amended verified
notice on March 20, 2012.
3 A copy of the operating agreement was
submitted with the notice of exemption. See
Anthony Macrie—Continuance in Control
Exemption—N.J. Seashore Lines, Inc., FD 35296,
slip op. at 3–4 (STB served Aug. 31, 2010).
4 See Effingham R.R.—Pet. for Declaratory
Order—Constr. at Effingham, IL, NOR 41986 et al.
(STB served Sept. 18, 1998), aff’d sub nom. United
Transp. Union-Ill. Legislative Bd. v. STB, 183 F.3d
606 (7th Cir. 1999).
5 ATRR’s verified notice of exemption is deemed
to have been filed on March 20, 2012, the date
ATRR filed its latest supplement.

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ATRR certifies that its projected
annual revenues as a result of this
transaction will not exceed levels that
will qualify it as a Class III rail carrier.
If the verified notice contains false or
misleading information, the exemption
is void ab initio. Petitions to revoke the
exemption under 49 U.S.C. 10502(d)
may be filed at any time. The filing of
a petition to revoke will not
automatically stay the effectiveness of
the exemption. Petitions to stay must be
filed no later than April 12, 2012 (at
least seven days before the exemption
becomes effective).
An original and 10 copies of all
pleadings, referring to Docket No. FD
35390, must be filed with the Surface
Transportation Board, 395 E Street SW.,
Washington, DC 20423–0001. In
addition, a copy of each pleading must
be served on David C. Dillon, Dillon &
Nash, Ltd., Suite 719, 111 West
Washington Street, Chicago, IL 60602.
Board decisions and notices are
available on our Web site at
www.stb.dot.gov.
Decided: March 27, 2012.
By the Board.
Rachel D. Campbell,
Director, Office of Proceedings.
Raina S. White,
Clearance Clerk.
[FR Doc. 2012–7696 Filed 3–29–12; 8:45 am]
BILLING CODE 4915–01–P

19417

Suite 11020, Washington, DC 20220, or
on-line at www.PRAComment.gov.
FOR FURTHER INFORMATION CONTACT:
Copies of the submission(s) may be
obtained by calling (202) 927–5331,
email at PRA@treasury.gov, or the entire
information collection request maybe
found at www.reginfo.gov.
Alcohol and Tobacco Tax and Trade
Bureau (TTB)
OMB Number: 1513–0020.
Type of Review: Revision of a
currently approved collection.
Title: Application for and
Certification/Exemption of Label/Bottle
Approval.
Form: TTB F 5100.31.
Abstract: The Federal Alcohol
Administration Act requires the labeling
of alcohol beverages and designates the
Treasury Department to oversee
compliance with regulations. This form
is completed by the regulated industry
members and submitted to TTB as an
application to label their products. TTB
oversees label applications to prevent
consumer deception and to deter
falsification of unfair advertising
practices on alcohol beverages.
Affected Public: Private Sector:
Businesses or other for-profits.
Estimated Total Burden Hours:
67,566.
Dawn D. Wolfgang,
Treasury PRA Clearance Officer.
[FR Doc. 2012–7792 Filed 3–29–12; 8:45 am]

DEPARTMENT OF THE TREASURY

BILLING CODE 4810–31–P

Submission for OMB Review;
Comment Request

DEPARTMENT OF THE TREASURY

March 28, 2012.

Office of the Comptroller of the
Currency

The Department of the Treasury will
submit the following information
collection request to the Office of
Management and Budget (OMB) for
review and clearance in accordance
with the Paperwork Reduction Act of
1995, Public Law 104–13, on or after the
date of publication of this notice.
DATES: Comments should be received on
or before April 30, 2012 to be assured
of consideration.
ADDRESSES: Send comments regarding
the burden estimate, or any other aspect
of the information collection, including
suggestion for reducing the burden, to
the (1) Office of Information and
Regulatory Affairs, Office of
Management and Budget, Attention:
Desk Officer for Treasury, New
Executive Office Building, Room 10235,
Washington, DC 20503, or email at
OIRA_Submission@OMB.EOP.GOV and
to the (2) Treasury PRA Clearance
Officer, 1750 Pennsylvania Ave. NW.,

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[Docket ID OCC–2011–0028]

FEDERAL RESERVE SYSTEM
[OP–1439]

FEDERAL DEPOSIT INSURANCE
CORPORATION
Proposed Guidance on Leveraged
Lending
Office of the Comptroller of the
Currency, Treasury (‘‘OCC’’); Board of
Governors of the Federal Reserve
System (‘‘Board’’ or ‘‘Federal Reserve’’);
and the Federal Deposit Insurance
Corporation (‘‘FDIC’’).
ACTION: Proposed joint guidance with
request for public comment.
AGENCY:

The OCC, Board, and the
FDIC (collectively, the Agencies) request
comment on proposed guidance on
leveraged lending (proposed guidance).

SUMMARY:

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Federal Register / Vol. 77, No. 62 / Friday, March 30, 2012 / Notices

The proposed guidance outlines highlevel principles related to safe and
sound leveraged lending activities,
including underwriting considerations,
assessing and documenting enterprise
value, risk management expectations for
credits awaiting distribution, stress
testing expectations and portfolio
management, and risk management
expectations. This proposed guidance
would apply to all Federal Reservesupervised, FDIC-supervised, and OCCsupervised financial institutions
substantively engaged in leveraged
lending activities. The number of
community banking organizations with
substantial exposure to leveraged
lending is very small; therefore the
Agencies generally expect that
community banking organizations
largely would be unaffected by this
guidance.
Comments must be submitted on
or before June 8, 2012.
ADDRESSES:
DATES:

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OCC
Please use the title ‘‘Proposed
Leveraged Lending Guidance’’ to
facilitate the organization and
distribution of the comments. You may
submit comments by any of the
following methods:
• Email:
regs.comments@occ.treas.gov.
• Mail: Office of the Comptroller of
the Currency, 250 E Street SW., Mail
Stop 2–3, Washington, DC 20219.
• Fax: (202) 874–5274.
• Hand Delivery/Courier: 250 E Street
SW., Mail Stop 2–3, Washington, DC
20219.
Instructions: You must include
‘‘OCC’’ as the agency name and ‘‘Docket
Number OCC–2011–0028’’ in your
comment. In general, OCC will enter all
comments received into the docket and
publish them on the Regulations.gov
Web site without change, including any
business or personal information that
you provide such as name and address
information, email addresses, or phone
numbers. Comments received, including
attachments and other supporting
materials, are part of the public record
and subject to public disclosure. Do not
enclose any information in your
comment or supporting materials that
you consider confidential or
inappropriate for public disclosure.
You may review comments and other
related materials that pertain to this
notice by any of the following methods:
• Viewing Comments Personally: You
may personally inspect and photocopy
comments at the OCC, 250 E Street SW.,
Washington, DC. For security reasons,
the OCC requires that visitors make an

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appointment to inspect comments. You
may do so by calling (202) 874–4700.
Upon arrival, visitors will be required to
present valid government-issued photo
identification and to submit to security
screening in order to inspect and
photocopy comments.
• Docket: You may also view or
request available background
documents and project summaries using
the methods described above.
Board
When submitting comments, please
consider submitting your comments by
email or fax because paper mail in the
Washington, DC, area and at the Board
may be subject to delay. You may
submit comments, identified by Docket
No. OP–1439, by any of the following
methods:
• Agency Web Site: http://
www.federalreserve.gov. Follow the
instructions for submitting comments at
http://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
• Federal eRulemaking Portal: http://
www.regulations.gov. Follow the
instructions for submitting comments.
• Email:
regs.comments@federalreserve.gov.
Include docket number in the subject
line of the message.
• FAX: (202) 452–3819 or (202) 452–
3102.
• Mail: Jennifer J. Johnson, Secretary,
Board of Governors of the Federal
Reserve System, 20th Street and
Constitution Avenue NW., Washington,
DC 20551.
All public comments are available
from the Board’s Web site at http://
www.federalreserve.gov/generalinfo/
foia/ProposedRegs.cfm as submitted,
unless modified for technical reasons.
Accordingly, your comments will not be
edited to remove any identifying or
contact information. Public comments
may also be viewed electronically or in
paper form in Room MP–500 of the
Board’s Martin Building (20th and C
Street NW., Washington, DC 20551)
between 9 a.m. and 5 p.m. on weekdays.
FDIC: You may submit comments by
any of the following methods:
• Agency Web site: http://
www.FDIC.gov/regulations/laws/
federal/propose.html. Follow the
instructions for submitting comments.
• Federal eRulemaking Portal: http://
www.regulations.gov. Follow the
instructions for submitting comments.
• Email: comments@FDIC.gov.
Include ‘‘Leveraged Lending Guidance’’
in the subject line of the message.
Comments received will be posted
without change to http://www.FDIC.gov/
regulations/laws/federal/propose.html,

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including any personal information
provided.
• Mail: Robert E. Feldman, Executive
Secretary, Attention: Comments/Legal
ESS, Federal Deposit Insurance
Corporation, 550 17th Street NW.,
Washington, DC 20429.
• Hand Delivery/Courier: Guard
station at the rear of the 550 17th Street
Building (located on F Street), on
business days between 7 a.m. and 5 p.m.
(EDT).
FOR FURTHER INFORMATION CONTACT:
OCC: Louise Francis, Commercial
Credit Technical Expert, 202–874–5170,
250 E Street SW., Washington, DC
20219.
Board: Lawrence A. Rufrano, Senior
Financial Analyst, (202) 452–2808,
Mary Aiken, Manager, Risk Policy, (202)
452–2904, or Benjamin W. McDonough,
Senior Counsel, (202) 452–2036, Legal
Division, Board of Governors of the
Federal Reserve System, 20th and C
Streets NW., Washington, DC 20551.
FDIC: William R. Baxter, Senior
Examination Specialist, 202–898–8514,
wbaxter@fdic.gov, 550 17th Street NW.,
Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
I. Background
All financial institutions 1 should
have the capacity to properly evaluate
and monitor underwritten credit risks,
to understand the effect of changes in
borrowers’ enterprise values upon credit
portfolio quality, and to assess the
sensitivity of future credit losses to
changes in enterprise values. Further, in
underwriting such credits, institutions
need to ensure that borrowers are able
to repay credit as due and at the same
time that borrowers have capital
structures, including their bank
borrowings and other debt, that support
the borrower’s continued operations
through economic cycles (that is, have
a sustainable capital structure).
Institutions should also be able to
demonstrate that they understand their
risks and the potential impact of
stressful events and circumstances on
borrowers’ financial condition. The
Agencies have previously provided
guidance to financial institutions for
their involvement in leveraged lending.
The recent financial crisis further
underscored the need for banking
organizations to employ sound
1 For purposes of this guidance, the term
‘‘financial institution’’ means national banks,
federal savings associations, and Federal branches
and agencies supervised by the OCC; state member
banks, bank holding companies, and all other
institutions for which the Federal Reserve is the
primary federal supervisor; and state nonmember
insured banks and other institutions supervised by
the FDIC.

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Federal Register / Vol. 77, No. 62 / Friday, March 30, 2012 / Notices
underwriting, to ensure that the risks in
leveraged lending activities are
appropriately incorporated in the
Allowance for Loan and Lease Losses
and capital adequacy analyses, to
monitor the sustainability of their
borrowers’ capital structures, and to
incorporate stress testing into their risk
management of both leveraged
portfolios and distribution pipelines, as
banking organizations unprepared for
stressful events and circumstances can
suffer acute threats to their financial
condition and viability. The proposed
guidance is intended to be consistent
with industry practices while building
upon the recently proposed guidance on
Stress Testing.2
II. Principal Elements of the Proposed
Guidance

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In April 2001, the Agencies (and
Office of Thrift Supervision) issued
guidance 3 regarding sound practices for
leveraged finance 4 activities (2001
Guidance). The 2001 Guidance
addressed expectations for the content
of credit policies, the need for welldefined underwriting standards, the
importance of defining an institution’s
risk appetite for leveraged transactions,
and the importance of stress testing
exposures and portfolios.
Since the issuance of that guidance,
the Agencies have observed tremendous
growth in the volume of leveraged credit
and in the participation of nonregulated investors. As the market has
grown, debt agreements have frequently
included features that provided
relatively limited lender protection,
including the absence of meaningful
maintenance covenants in loan
agreements and the inclusion of
payment-in-kind (PIK)-toggle features in
junior capital instruments (i.e., a feature
where the borrower has the option to
pay interest in cash or in-kind, which
increases the principal owed), both of
which lessen lenders’ recourse in the
event that a borrower’s performance
does not meet projections. Further, the
capital structures and repayment
prospects for some transactions,
whether originated to hold or distribute,
2 ‘‘Annual Stress Test,’’ Notice of Proposed
Rulemaking, 77 FR 3408 (January 24, 2012).
3 SR 01–9, ‘‘Interagency Guidance on Leveraged
Financing,’’ April 17, 2001, OCC Bulletin 2001–8,
FDIC Press Release PR–28–2001.
4 For the purpose of this guidance, references to
leveraged finance or leveraged transactions
encompass the entire debt structure of a leveraged
obligor (including senior loans and letters of credit,
mezzanine tranches, senior and subordinated
bonds). References to leveraged lending and
leveraged loan transactions and credit agreements
refer to the senior loan and letter of credit tranches
held by both bank and non-bank investors.

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have at times been aggressive in light of
the overall risk of the credit.
Absent meaningful limits and to
support burgeoning demand from
institutional investors, the pipeline of
aggressively priced and structured
commitments has grown rapidly.
Further, management information
systems (MIS) at some institutions have
proven less than satisfactory in
accurately aggregating exposures on a
timely basis, and many institutions have
found themselves holding large
pipelines of higher-risk commitments at
a time when buyer demand for risky
assets diminished significantly.
In light of these changes, the Agencies
have decided to replace the 2001
Guidance with new leveraged finance
guidance (proposed guidance). The
proposed guidance describes
expectations for the sound risk
management of leveraged finance
activities, including the importance of
institutions developing and
maintaining:
• Transactions that are structured to
reflect a sound business premise, an
appropriate capital structure, and
reasonable cash flow and balance sheet
leverage. Combined with supportable
performance projections, these
considerations should clearly support a
borrower’s capacity to repay and delever to a sustainable level over a
reasonable period, whether
underwritten to hold or distribute.
• A definition of leveraged finance
that facilitates consistent application
across all business lines.
• Well-defined underwriting
standards that, among other things,
define acceptable leverage levels and
describe amortization expectations for
senior and subordinate debt.
• A credit limit and concentration
framework that is consistent with the
institution’s risk appetite.
• Sound MIS that enable management
to identify, aggregate, and monitor
leveraged exposures and comply with
policy across all business lines.
• Strong pipeline management
policies and procedures that, among
other things, provide for real-time
information on exposures and limits,
and exceptions to the timing of expected
distributions and approved hold levels.
The proposed guidance replaces
existing leveraged finance guidance and
forms the basis of the Agencies’
supervisory focus and review of
supervised financial institutions,
including, as applicable, subsidiaries
and affiliates involved in leveraged
lending. In implementing the guidance,
the Agencies will consider the size and
risk profile of an institution’s leveraged
portfolio relative to its assets, earnings,

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liquidity, and capital. Although some
sections of this proposal are intended to
apply to all leveraged lending
transactions (e.g., underwriting), the
vast majority of community banks
should not be affected by this guidance
as they have no exposure to leveraged
credits. The limited number of
community and smaller institutions that
are involved in leveraged lending
activities should discuss with their
primary regulator implementation of
cost-effective controls appropriate for
the complexity of their exposures and
activities.
III. Administrative Law Matters
A. Paperwork Reduction Act Analysis
In accordance with the Paperwork
Reduction Act (PRA) of 1995 (44 U.S.C.
3506; 5 CFR part 1320, Appendix A.1),
the Agencies reviewed the proposed
guidance. The Agencies may not
conduct or sponsor, and an organization
is not required to respond to, an
information collection unless the
information collection displays a
currently valid OMB control number.
The Agencies have determined that
certain aspects of the proposed guidance
may constitute a collection of
information. In particular, these aspects
are the provisions that state a banking
organization should (i) have
underwriting policies for leveraged
lending, including stress testing
procedures for leveraged credits; (ii)
have risk management policies,
including stress testing procedures for
pipeline exposures; and (iii) have
policies and procedures for
incorporating the results of leveraged
credit and pipeline stress tests into the
firm’s overall stress testing framework.
The frequency of information collection
is estimated to be annual. Respondents
are banking organizations with
leveraged lending activities as defined
in the guidance.
Report Title: Guidance on Leveraged
Lending.
Frequency of Response: Annual.
Affected Public: Banking
Organizations with Leveraged Lending.
OCC
OMB Control No.: To be assigned by
OMB.
Estimated number of respondents: 25.
Estimated average time per
respondent: 1,350.4 hours to build;
1,705.6 hours for ongoing use.
Estimated total annual burden hours:
33,760 hours to build, 42,640 hours for
ongoing use.
Board
Agency information collection
number: FR 4203.

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OMB Control No.: To be assigned by
OMB.
Estimated number of respondents: 41.
Estimated average time per
respondent: 1,064.4 hours to build,
754.4 hours for ongoing use.
Estimated total annual burden hours:
43,640 hours to build; 30,930 hours for
ongoing use.

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FDIC
OMB Control No.: To be assigned by
OMB.
Estimated number of respondents: 9.
Estimated average time per
respondent: 986.7 hours to build; 529.3
hours for ongoing use.
Estimated total annual burden hours:
8,880 hours to build, 4,764 hours for
ongoing use.
The estimated time per respondent is
an average that varies by agency because
of differences in the composition of the
institutions under each agency’s
supervision (e.g., size distribution of
institutions) and volume of leveraged
lending activities.
The Agencies invite comments on the
following:
(1) Whether the proposed collection
of information is necessary for the
proper performance of the regulatory
function; including whether the
information has practical utility;
(2) The accuracy of the estimates of
the burden of the proposed information
collection, including the cost of
compliance;
(3) Ways to enhance the quality,
utility, and clarity of the information to
be collected; and
(4) Ways to minimize the burden of
information collection on respondents,
including through the use of automated
collection techniques or other forms of
information technology.
Additionally, please send a copy of
your comments regarding these
proposed information collections by
mail to: Desk Officer, U.S. Office of
Management and Budget, 725 17th
Street NW., #10235, Washington, DC
20503, or by fax to (202) 395–6974.
These information collections are
authorized pursuant to the following
statutory authorities:
OCC: National Bank Act, (12 U.S.C. 1
et seq.; 12 U.S.C. 161) and the
International Banking Act (12 U.S.C.
3101 et seq.)
Board: Sections 11(a), 11(i), 25, and
25A of the Federal Reserve Act (12
U.S.C. 248(a), 248(i), 602, and 611),
section 5 of the Bank Holding Company
Act (12 U.S.C. 1844), and section 7(c) of
the International Banking Act (12 U.S.C.
3105(c)).
FDIC: Federal Deposit Insurance Act,
(12 U.S.C. 1811 et seq.) and the

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International Banking Act (12 U.S.C.
3101 et seq.).
The agencies expect to review the
policies and procedures for stress
testing as part of their supervisory
processes. To the extent they collect
information during an examination of a
banking organization, confidential
treatment may be afforded to the records
under exemption 8 of the Freedom of
Information Act (FOIA), 5 U.S.C.
552(b)(8).
B. Regulatory Flexibility Act Analysis
While the guidance is not being
adopted as a rule, the Agencies have
considered the potential impact of the
proposed guidance on small banking
organizations using the considerations
that would apply if the Regulatory
Flexibility Act (5 U.S.C. 603(b)) were
applicable. For the reason discussed in
the Supplementary Information above,
the Agencies are issuing the proposed
guidance to emphasize the importance
of properly underwriting leveraged
lending transactions and incorporating
those exposures into stress and capital
tests for institutions with significant
exposures to these credits. Based on its
analysis and for the reasons stated
below, the Agencies believe that the
proposed guidance will not have a
significant economic impact on a
substantial number of small entities.
Nevertheless, the Agencies are seeking
comment on whether the proposed
guidance would impose undue burdens
on, or have unintended consequences
for, small organizations.
Under regulations issued by the Small
Business Administration (SBA), a small
banking organization is defined as a
banking organization with total assets of
$175 million or less. See 13 CFR
121.201. The guidance being proposed
by the Agencies is intended for banking
organizations supervised by the
Agencies with substantial exposures to
leveraged lending activities, including
national banks, federal savings
associations, state nonmember banks,
state member banks, bank holding
companies, and U.S. branches and
Agencies of foreign banking
organizations. Given the sheer size of
leveraged lending transactions, most of
which exceed $50 million, and the
Agencies’ observations that leveraged
loans tend to be held primarily by large
or global banking institutions with total
assets that are well above $175 million,
the effects of this guidance upon smaller
institutions are expected to be
negligible. Banking organizations that
are subject to the proposed guidance
therefore substantially exceed the $175
million total asset threshold at which a
banking organization is considered a

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small banking organization under SBA
regulations.
In light of the foregoing, the Agencies
believe that the proposed guidance, if
adopted in final form, would not have
a significant economic impact on a
substantial number of small entities. As
noted above, the Agencies specifically
seek comment on whether the proposed
guidance would impose undue burdens
on, or have unintended consequences
for, small organizations and whether
there are ways such potential burdens or
consequences could be addressed in a
manner consistent with the guidance.
IV. Proposed Guidance
The text of the proposed guidance is
as follows:
Purpose
In April 2001, the Agencies (Office of the
Comptroller of the Currency, Board of
Governors of the Federal Reserve System,
Federal Deposit Insurance Corporation, and
Office of Thrift Supervision) issued
guidance 5 regarding sound practices for
leveraged finance 6 activities (2001
Guidance). The 2001 Guidance addressed
expectations for the content of credit
policies, the need for well-defined
underwriting standards, the importance of
defining an institution’s risk appetite for
leveraged transactions, and the importance of
stress testing exposures and portfolios.
Since the issuance of that guidance, the
Agencies have observed tremendous growth
in the volume of leveraged credit and in the
participation of non-regulated investors. As
the market has grown, debt agreements have
frequently included features that provided
relatively limited lender protection,
including the absence of meaningful
maintenance covenants in loan agreements
and the inclusion of payment-in-kind (PIK)toggle features in junior capital instruments,
both of which lessened lenders’ recourse in
the event of a borrower’s subpar
performance. Further, the capital structures
and repayment prospects for some
transactions, whether originated to hold or
distribute, have at times been aggressive.
Absent meaningful limits and to support
burgeoning demand from institutional
investors, the pipeline of aggressively priced
and structured commitments has grown
rapidly. Further, management information
systems (MIS) at some institutions have
proven less than satisfactory in accurately
aggregating exposures on a timely basis, and
many institutions have found themselves
holding large pipelines of higher-risk
5 SR 01–9, ‘‘Interagency Guidance on Leveraged
Financing,’’ April 17, 2001, OCC Bulletin 2001–8,
FDIC Press Release PR–28–2001.
6 For the purpose of this guidance, references to
leveraged finance or leveraged transactions
encompass the entire debt structure of a leveraged
obligor (including senior loans and letters of credit,
mezzanine tranches, senior and subordinated
bonds). References to leveraged lending and
leveraged loan transactions and credit agreements
refer to the senior loan and letter of credit tranches
held by both bank and non-bank investors.

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commitments at a time when buyer demand
for risky assets diminished significantly.
In light of these changes, the Agencies have
decided to replace the 2001 Guidance with
new leveraged finance guidance (2012
Guidance). The 2012 Guidance describes
expectations for the sound risk management
of leveraged finance activities, including the
importance for institutions to develop and
maintain:
• Transactions that are structured to reflect
a sound business premise, an appropriate
capital structure, and reasonable cash flow
and balance sheet leverage. Combined with
supportable performance projections, these
should clearly support a borrower’s capacity
to repay and de-lever to a sustainable level
over a reasonable period, whether
underwritten to hold or distribute.
• A definition of leveraged finance that
facilitates consistent application across all
business lines.
• Well-defined underwriting standards
that, among other things, define acceptable
leverage levels and describe amortization
expectations for senior and subordinate debt.
• A credit limit and concentration
framework that is consistent with the
institution’s risk appetite.
• Sound MIS that enable management to
identify, aggregate, and monitor leveraged
exposures and comply with policy across all
business lines.
• Strong pipeline management policies
and procedures that, among other things,
provide for real-time information on
exposures and limits, and exceptions to the
timing of expected distributions and
approved hold levels.

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Applicability
This issuance replaces existing leveraged
finance guidance and forms the basis of the
Agencies’ supervisory focus and review of
supervised financial institutions, including
subsidiaries and affiliates. Implementation of
this guidance should be consistent with the
size and risk profile of an institution’s
leveraged portfolio relative to its assets,
earnings, liquidity, and capital. Although
some sections of this guidance should apply
to all leveraged transactions (e.g.,
underwriting), the vast majority of
community banks should not be affected by
this guidance as they have no exposure to
leveraged credits. The limited number of
community and smaller institutions that have
leveraged lending activities should discuss
with their primary regulator implementation
of cost-effective controls appropriate for the
complexity of their exposures and activities.
Risk Management Framework
Given the high risk profile of leveraged
exposures, institutions engaged in leveraged
financing should adopt a risk management
framework that has an intensive and frequent
review and monitoring process. The
framework should have as its foundation
written risk objectives, risk acceptance
criteria, and risk controls. The lack of robust
risk management processes and controls in
institutions with significant leveraged
finance activities could contribute to a
finding that the institution is engaged in an
unsafe and unsound banking practice. This

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guidance outlines minimum regulatory
expectations and covers the following topics:
• Definition of Leveraged Finance.
• General Policy Expectations.
• Underwriting Standards.
• Valuation Standards.
• Pipeline Management.
• Reporting and Analytics.
• Rating Leveraged Loans.
• Other Key Risk Management
Components.
• Credit Analysis.
• Problem Credits.
• Deal Sponsors.
• Credit Review.
• Conflicts of Interest.
• Anti-tying.
• Reputation Risk.
• Securities Laws.
• Compliance.
Definition of Leveraged Finance
Institutions’ policies should include
criteria to define leveraged finance.
Numerous definitions of leveraged finance
exist throughout the financial services
industry and commonly contain some
combination of the following:
• Proceeds are used for buyouts,
acquisitions, or capital distributions.
• Transactions where the borrower’s Total
Debt/EBITDA (earnings before interest, taxes,
depreciation, and amortization) or Senior
Debt/EBITDA exceed 4.0X EBITDA or 3.0X
EBITDA, respectively, or other defined levels
appropriate to the industry or sector.7
• Borrower that is recognized in the debt
markets as a highly leveraged firm, which is
characterized by a high debt-to-net-worth
ratio.
• Transactions where the borrower’s postfinancing leverage, when measured by its
leverage ratios, debt-to-assets, debt-to-networth, debt-to-cash flow, or other similar
standards common to particular industries or
sectors, significantly exceeds industry norms
or historical levels.8
Institutions engaging in this type of activity
should define leveraged finance within their
policies in a manner sufficiently detailed to
ensure consistent application across all
business lines.
Examiners should expect the bank’s
definition to describe clearly the purposes
and financial characteristics common to
these transactions, and this definition should
include the bank’s exposure to financial
vehicles, whether or not leveraged, that
engage in leveraged finance activities.
General Policy Expectations
An institution’s credit policies and
procedures for leveraged finance should
address the following items:
• Management should identify the
institution’s risk appetite, which should
include clearly defined amounts of leveraged
finance that the institution is willing to
7 Cash should not be netted against debt for
purposes of this calculation.
8 Higher quality borrowers not initially
designated as part of the leveraged portfolio, but
which otherwise meet the institution’s definition,
should be added to the portfolio if their financial
performance and prospects deteriorate (i.e., fallen
angels).

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underwrite (pipeline limits) and leveraged
loans it is willing to retain (i.e., transaction
and aggregate hold levels). The designated
risk appetite should be supported by an
analysis of the potential effect on earnings,
capital, liquidity, and other risks that result
from these positions, and should be approved
by the board of directors.
• A limit framework that includes limits or
guidelines for single obligors and
transactions, aggregate hold portfolio,
aggregate pipeline exposure, and industry
and geographic concentrations. The limit
framework should identify the related
approval authorities and exception tracking
provisions. In addition to notional pipeline
limits, underwriting limit frameworks that
assess stress losses, flex terms, economic
capital usage, and earnings at risk or
otherwise provide a more nuanced view of
potential risk are expected from institutions
with significant leveraged finance exposure.
• Ensuring that the risks of leveraged
lending activities are appropriately reflected
in an institution’s Allowance for Loan and
Lease Losses and capital adequacy analyses.
• Credit and underwriting approval
authorities, including the procedures for
approving and documenting changes to
approved transaction structures and terms.
• Appropriate oversight by senior
management, including adequate and timely
reporting to the board.
• The expected risk-adjusted returns for
leveraged transactions.
• Minimum underwriting standards (see
Underwriting Standards below).
• The degree to which underwriting
practices may differ between primary loan
origination and secondary loan acquisition.
Underwriting Standards
An institution’s underwriting standards
should be clear, written, measurable, and
accurately reflect the institution’s risk
appetite for leveraged finance transactions.
Institutions should have clear underwriting
limits regarding leveraged transactions,
including the size that the institution will
arrange both individually and in the
aggregate for distribution. Originating
institutions should be mindful of
reputational risks associated with poorly
underwritten transactions, which may find
their way into a wide variety of investment
instruments and exacerbate systemic risks
within the general economy. At a minimum,
underwriting standards should consider:
• Whether the business premise for each
transaction is sound and its capital structure
is sustainable regardless of whether the
transaction is underwritten for the
institution’s own portfolio or with the intent
to distribute. The entirety of a borrower’s
capital structure should reflect the
application of sound financial analysis and
underwriting principles.
• A borrower’s capacity to repay and its
ability to de-lever to a sustainable level over
a reasonable period. As a general guide, base
case cash-flow projections should show the
ability over a five-to-seven year period to
fully amortize senior secured debt or repay
at least 50 percent of total debt. Projections
should also include one or more realistic
downside scenarios that reflect the key risks
identified in the transaction.

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• Expectations for the depth and breadth
of due diligence on leveraged transactions.
This should include standards for evaluating
various types of collateral, and it should
clearly define credit risk management’s role
in such due diligence.
• Standards for evaluating expected riskadjusted returns. The standards should
include identification of expected
distribution strategies, including alternative
strategies for funding and disposing of
positions during market disruptions, and the
potential for losses during such periods.
• Degree of reliance on enterprise value
and other intangible assets for loan
repayment, along with acceptable valuation
methodologies, and guidelines for the
frequency of periodic reviews of those
values.
• Expectations for the degree of support
provided by the sponsor (if any), taking into
consideration their financial capacity, the
extent of their capital contribution at
inception, and other motivating factors.
• Whether credit agreement terms allow
for the material dilution, sale or exchange of
collateral or cash flow-producing assets
without lender approval.
• Credit agreement covenant protections,
including financial performance (such as
debt to cash flow, interest coverage or fixed
charge coverage), reporting requirements, and
compliance monitoring. Generally, a leverage
level after planned asset sales (i.e., debt that
must be serviced from operating cash flow)
in excess of 6x for Total Debt/EBITDA raises
concerns for most industries.
• Collateral requirements in credit
agreements that specify acceptable collateral
and risk-appropriate measures and controls,
including acceptable collateral types, loan-tovalue guidelines, and appropriate collateral
valuation methodologies. Standards for assetbased loans should also outline expectations
for the use of collateral controls (e.g.,
inspections, independent valuations, and
lockbox), other types of collateral and
account maintenance agreements, and
periodic reporting requirements.
• Whether loan agreements provide for
distribution of ongoing financial and other
relevant credit information to all
participants/investors.
Nothing in the preceding standards should
be considered to discourage providing
financing to borrowers engaged in workout
negotiations, or as part of a pre-packaged
financing under the bankruptcy code. Neither
are they meant to discourage well-structured
standalone asset-based credit facilities to
borrowers with strong lender monitoring and
controls, for which banks should consider
separate underwriting and risk rating
guidance.
Valuation Standards
Lenders often rely upon enterprise value
and other intangibles when (1) evaluating the
feasibility of a loan request, (2) determining
the debt reduction potential of planned asset
sales, (3) assessing a borrower’s ability to
access the capital markets, and (4) estimating
the strength of a secondary source of
repayment. Lenders may also view enterprise
value as a useful benchmark for assessing a
sponsor’s economic incentive to provide

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financial support. Given the specialized
knowledge needed for the development of a
credible enterprise valuation and the
importance of enterprise valuations in the
underwriting and ongoing risk assessment
processes, enterprise valuations should be
performed or validated by qualified persons
independent of the origination function.
Conventional appraisal theory provides
three approaches for valuing closely held
businesses—asset, income, and market. Asset
approach methods consider an enterprise’s
underlying assets in terms of its net goingconcern or liquidation value. Income
approach methods consider an enterprise’s
ongoing cash flows or earnings and apply
appropriate capitalization or discounting
techniques. Market approach methods derive
value multiples from comparable company
data or sales transactions. Although value
estimates should reconcile results from the
use of all three approaches, the income
approach is generally considered the most
common and reliable method. There are two
common methods to the income approach.
The ‘‘capitalized cash flow’’ method
determines the value of a company as the
present value of all the future cash flows that
the business can generate in perpetuity. An
appropriate cash flow is determined and then
divided by a risk-adjusted capitalization rate,
most commonly the weighted average cost of
capital. This method is most appropriate
when cash flows are predictable and stable.
The ‘‘discounted cash flow’’ method is a
multiple-period valuation model that
converts a future series of cash flows into
current value by discounting those cash
flows at a rate of return (discount rate) that
reflects the risk inherent therein and matches
the cash flow. This method is most
appropriate when future cash flows are
cyclical or variable between periods. Both
methods involve numerous assumptions, and
supporting documentation should therefore
fully explain the evaluator’s reasoning and
conclusions.
When an obligor is experiencing a financial
downturn or facing adverse market
conditions, a lender should reflect those
adverse conditions in its assumptions for key
variables such as cash flow, earnings, and
sales multiples when assessing enterprise
value as a potential source of repayment.
Changes in the value of a firm’s assets should
be tested under a range of stress scenarios,
including business conditions more adverse
than the base case scenario. Stress testing of
enterprise values and their underlying
assumptions should be conducted and
documented both at origination of the
transaction and periodically thereafter,
incorporating the actual performance of the
borrower and any adjustments to projections.
The institution should perform its own
discounted cash flow analysis to validate the
enterprise value implied by proxy measures
such as multiples of cash flow, earnings, or
sales.
Valuations derived with even the most
rigorous valuation procedures are imprecise
and ultimately may not be realized.
Therefore, institutions relying on enterprise
value or illiquid and hard-to-value collateral
should have policies that provide for
appropriate loan-to-value ratios, discount

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rates, and collateral margins. Based on the
nature of an institution’s leveraged lending
activities, establishing limits for the
proportion of individual transactions and the
total portfolio that are supported by
enterprise value may be appropriate.
Whatever the methodology, assumptions
underlying enterprise valuations should be
clearly documented, well supported, and
understood by institutions’ appropriate
decision-makers and risk oversight units.
Examiners should ensure that the valuation
approach is appropriate for the company’s
industry and condition.
Pipeline Management
Market disruptions can substantially
impede the ability of an underwriter to
consummate syndications or otherwise sell
down exposures, which may result in
material losses. Accordingly, institutions
should have strong risk management and
controls over transactions in the pipeline,
including amounts to be held and those to be
distributed. An institution should be able to
differentiate transactions according to tenor,
investor class (e.g., pro-rata, institutional),
structure, and key borrower characteristics
(e.g., industry). In addition, an institution
should develop and maintain:
• A clearly articulated and documented
appetite for underwriting risk that considers
the potential effects on earnings, capital,
liquidity, and other risks that result from
these positions.
• Written procedures for defining and
managing distribution fails and ‘‘hung’’
deals, which are identified by an inability to
sell down the exposure within a reasonable
period (generally 90 days from closing). The
institution’s board should establish clear
expectations for the disposition of pipeline
transactions that have not been sold
according to their original distribution plan.
Such transactions that are subsequently
reclassified as hold-to-maturity should also
be included in reports to management and
the board of directors.
• Guidelines for conducting periodic stress
tests on pipeline exposures to quantify the
potential impact of changing economic/
market conditions on asset quality, earnings,
liquidity, and capital.
• Controls to monitor performance of the
pipeline against original expectations, and
regular reports of variances to management,
including the amount and timing of
syndication/distribution variances, and
reporting if distribution was achieved
through a recourse sale.
• Reports that include individual and
aggregate transaction information that
accurately portrays risk and concentrations
in the pipeline.
• Limits on aggregate pipeline
commitments and periodic testing of such
exposures under different market scenarios.
• Limits on the amount of loans that an
institution is willing to retain on its own
books (i.e., borrower/counterparty and
aggregate hold levels), and limits on the
underwriting risk that will be undertaken for
amounts intended for distribution.
• Policies and procedures that identify
acceptable accounting methodologies and
controls in both functional as well as

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dysfunctional markets, and that direct
prompt recognition of losses in accordance
with generally accepted accounting
principles.
• Policies and procedures addressing the
use of hedging to reduce pipeline and hold
exposures. Policies should address
acceptable types of hedges and the terms
considered necessary for providing hedge
credit (netting) for exposure measurement.
• Plans and provisions addressing
contingent liquidity and compliance with
Regulation W (12 CFR part 223) when market
illiquidity or credit conditions change,
interrupting normal distribution channels.
Reporting and Analytics
The Agencies expect financial institutions
to diligently monitor higher risk credits,
including leveraged loans. An institution’s
management should receive comprehensive
reports about the characteristics and trends
in such exposures at least quarterly, and
summaries should be provided to the board
of directors. Policies should identify the
fields to be populated and captured by an
institution’s MIS, which should yield
accurate and timely reporting to management
and the board that may include:
• Individual and portfolio exposures
within and across all business lines and legal
vehicles, including the pipeline.
• Risk rating distribution and migration
analysis, including maintenance of a list of
those borrowers who have been removed
from the leveraged portfolio due to changes
in their financial characteristics and overall
risk profile.
• Industry mix and maturity profile.
• Metrics derived from probabilities of
default and loss given default.
• Portfolio performance measures,
including noncompliance with covenants,
restructurings, delinquencies, nonperforming amounts and charge-offs.
• Amount of impaired assets and the
nature of impairment (i.e., permanent,
temporary), and the amount of the Allowance
for Loan and Lease Losses attributable to
leveraged lending.
• The aggregate level of policy exceptions
and the performance of that portfolio.
• Exposure by collateral type, including
unsecured transactions and those where
enterprise value is a source of repayment for
leveraged loans. Reporting should also
consider the implications of defaults that
trigger pari passu treatment for all lenders
and thus dilute secondary support from
collateral value.
• Secondary market pricing data and
trading volume when available.
• Exposure and performance by deal
sponsor.
• Gross and net exposures, hedge
counterparty concentrations, and policy
exceptions.
• Actual versus projected distribution of
the syndicated pipeline, with regular reports
of excess levels over the hold targets for
syndication inventory. Pipeline definitions
should clearly identify the type of exposure
(e.g., committed exposures that have not been
accepted by the borrower, commitments
accepted but not closed, and funded and
unfunded commitments that have closed but
have not been distributed).

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• Guidelines for conducting periodic
portfolio stress tests (including pipeline
exposures) or sensitivity analyses to quantify
the potential impact of changing economic/
market conditions on asset quality, earnings,
liquidity, and capital. The sophistication of
stress-testing practices and sensitivity
analysis should be consistent with the size,
complexity, and risk characteristics of the
leveraged loan portfolio. The leveraged
portfolio also should be included in any
enterprise-wide stress tests.
• Total and segment leveraged finance
exposures, including subordinated debt and
equity holdings, alongside established limits.
Reports should provide a detailed and
comprehensive view of global exposure,
including situations where institutions have
indirect exposure to an obligor or are holding
a previously sold position as collateral or as
a reference asset in a derivative.
• Borrower/counterparty leveraged finance
reporting should consider exposures booked
in other business units throughout the
institution, including indirect exposure such
as default swaps and total return swaps
naming the distributed paper as a covered or
reference asset or collateral exposure through
repo transactions. Additionally, the
institution should consider positions held in
available for sale or traded portfolios or
through structured investment vehicles
owned or sponsored by the originating
institution or its subsidiaries or affiliates.
Risk Rating Leveraged Loans
The Agencies have previously issued
guidance on rating credit exposures and
credit rating systems, which applies to all
credit transactions, including those in the
leveraged lending category.9
Risk rating leveraged loans involves the
use of realistic repayment assumptions to
determine the borrower’s ability to de-lever
to a sustainable level within a reasonable
period of time. If the projected capacity to
pay down debt from cash flow is nominal,
with refinancing the only viable option, the
credit will usually be criticized even if it has
been recently underwritten. In cases where
leveraged loan transactions have no
reasonable or realistic prospects to de-lever,
a substandard classification is likely.
Furthermore, when assessing debt service
capacity, extensions and restructures should
be scrutinized to ensure that they are not
merely masking repayment capacity
problems.
If the primary source of repayment
becomes inadequate it would generally be
inappropriate to consider enterprise value as
a secondary source unless that value is well
supported. Evidence of well-supported value
may include binding purchase and sale
agreements with qualified third parties or
through valuations that fully consider the
effect of the borrower’s distressed
circumstances and potential changes in
business and market conditions. For such
borrowers, when a portion of the loan may
9 FRB SR 98–25 ‘‘Sound Credit Risk Management
and the Use of Internal Credit Risk Ratings at Large
Banking Organizations;’’ OCC Handbooks ‘‘Rating
Credit Risk’’ and ‘‘Leveraged Lending;’’ FDIC Risk
Management Manual of Examination Policies,
‘‘Loan Appraisal and Classification.’’

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not be protected by pledged assets or a wellsupported enterprise value, examiners
generally will rate that portion doubtful or
loss and place the loan on nonaccrual.
Other Key Risk Management Components
Credit Analysis
Effective underwriting and management of
leveraged finance risk is highly dependent on
the quality of analysis employed during the
approval process as well as ongoing
monitoring. Policies should address the need
for a comprehensive assessment of financial,
business, industry, and management risks
including, but not limited to, whether:
• Cash flow analyses rely on overly
optimistic or unsubstantiated projections of
sales, margins, and merger and acquisition
synergies.
• Liquidity analyses include performance
metrics appropriate for the borrower’s
industry, predictability of the borrower’s
cash flow, measurement of the borrower’s
operating cash needs, and ability to meet
debt maturities.
• Projections exhibit an adequate margin
for unanticipated merger-related integration
costs.
• Projections are stress tested for several
downside scenarios, including a covenant
breach.
• Transactions are reviewed at least
quarterly to determine variance from plan,
the risk implications thereof, and the
accuracy of risk ratings and accrual status.
From inception, the credit file should contain
a chronological rationale for and analysis of
all substantive changes to the borrower’s
operating plan and variance from expected
financial performance.
• Enterprise and collateral valuations are
derived or validated independently of the
origination function, are timely, and consider
potential value erosion.
• Collateral liquidation and asset sale
estimates are conservative.
• Potential collateral shortfalls are
identified and factored into risk rating and
accrual decisions.
• Contingency plans anticipate changing
conditions in debt or equity markets when
exposures rely on refinancing or the issuance
of new equity.
• The borrower is adequately protected
from interest rate and foreign exchange risk.
Problem Credit Management
Financial institutions should formulate
individual action plans when working with
borrowers that are experiencing diminished
operating cash flows, depreciated collateral
values, or other significant variance to plan.
Weak initial underwriting of transactions,
coupled with poor structure and limited
covenants, may make problem credit
discussions and eventual restructurings more
difficult for lenders as well as result in less
favorable outcomes.
Institutions should formulate credit
policies that define expectations for the
management of adversely rated and other
high-risk borrowers whose performance
departs significantly from planned cash
flows, asset sales, collateral values, or other
important targets. These policies should
stress the need for workout plans that contain

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quantifiable objectives and measureable time
frames. Actions may include working with
the borrower for an orderly resolution while
preserving the institution’s interests, sale of
the credit in the secondary market, or
liquidation. Problem credits should be
reviewed regularly for risk rating accuracy,
accrual status, recognition of impairment
through specific allocations, and charge-offs.

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Deal Sponsors
Institutions should develop guidelines for
evaluating the qualifications of financial
sponsors and implement a process to
regularly monitor performance. Deal
sponsors may provide valuable support to
borrowers such as strategic planning,
management, and other tangible and
intangible benefits. Sponsors may also
provide a source of financial support for a
borrower that fails to achieve projections.
Institutions generally rate borrowers based on
their analysis of the borrowers’ standalone
financial condition. However, lending
institutions may consider support from a
sponsor in assigning an internal risk rating
when the institution can document the
sponsor’s history of demonstrated support as
well as the economic incentive, capacity, and
stated intent to continue to support the
transaction. However, even with documented
capacity and a history of support, a sponsor’s
potential contributions may not mitigate
examiner criticism absent a documented
commitment of continued support. An
evaluation of a sponsor’s financial support
should include the following:
• Sponsor’s historical performance in
supporting its investments, financially and
otherwise.
• Sponsor’s economic incentive to
support, including the nature and amount of
capital contributed at inception.
• Documentation of degree of support (e.g.,
guarantee, comfort letter, verbal assurance).
• Consideration of the sponsor’s
contractual investment limitations.
• To the extent feasible, a periodic review
of the sponsor’s financial statements and
trends, and an analysis of its liquidity,
including the ability to fund multiple deals.
• Consideration of the sponsor’s dividend
and capital contribution practices.
• Likelihood of supporting the borrower
compared to other deals in the sponsor’s
portfolio.
• Guidelines for evaluating the
qualifications of financial sponsors and a
process to regularly monitor performance.
Credit Review
Institutions should have a strong and
independent credit review function with a
demonstrated ability to identify portfolio
risks and documented authority to escalate
inappropriate risks and other findings to
senior management. Due to the elevated risk
inherent in leveraged finance, and depending
on the relative size of an institution’s
leveraged finance business, it may be prudent
for the institution’s credit review function to
examine the leveraged portfolio more
frequently than other segments, go into
greater depth, and be more selective in
identifying personnel to assess the
underlying transactions. Portfolio reviews

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should generally be conducted at least
annually. For many institutions, the risk
characteristics of the leveraged portfolio,
such as high reliance on enterprise value,
concentrations, adverse risk rating trends, or
portfolio performance, may dictate more
frequent reviews.
Institutions should staff their internal
credit review function appropriately and
ensure that it has sufficient resources to
ensure timely, independent, and accurate
assessments of leveraged finance
transactions. Reviews should evaluate the
level of risk and risk rating integrity,
valuation methodologies, and the quality of
risk management. Internal credit reviews also
should encompass a review of the
institution’s leveraged finance practices,
policies and procedures to ensure that they
are consistent with regulatory guidance.
Conflicts of Interest
Institutions should develop appropriate
policies to address and prevent potential
conflicts of interest. For example, a lender
may be reluctant to use an aggressive
collection strategy with a problem borrower
because of the potential impact on the value
of the lender’s equity interest. A lender may
receive pressure to provide financial or other
privileged client information that could
benefit an affiliated equity investor. Such
conflicts also may occur where the
underwriting bank serves as financial advisor
to the seller and simultaneously offers
financing to multiple buyers (i.e., stapled
financing). Similarly, there may be
conflicting interests between the different
lines of business or between the institution
and its affiliates. These and other situations
may arise that create conflicts of interest
between the institution and its customers.
Policies should clearly define potential
conflicts of interest, identify appropriate risk
management controls and procedures, enable
employees to report potential conflicts of
interest to management for action without
fear of retribution, and ensure compliance
with applicable law. Further, management
should establish responsibility for training
employees on how to avoid conflicts of
interest, as well as provide for reporting,
tracking, and resolution of any conflicts of
interest that occur.
Anti-Tying Regulations
Because leveraged finance transactions
often involve a number of types of debt and
several bank products, institutions should
ensure that their policies incorporate
safeguards to prevent violations of anti-tying
regulations. Section 106(b) of the BHC Act
Amendments of 1970 prohibits certain forms
of product tying by banks and their affiliates.
The intent behind section 106(b) is to prevent
institutions from using their market power
over certain products to obtain an unfair
competitive advantage in other products.
Reputational Risk
Leveraged finance transactions are often
syndicated through the bank and
institutional markets. An institution’s
apparent failure to meet its legal or fiduciary
responsibilities in underwriting and
distributing transactions can damage its
reputation and impair its ability to compete.

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Similarly, institutions distributing
transactions that over time have significantly
higher default or loss rates and performance
issues may also see their reputation damaged
in the markets.
Securities Laws
Equity interests and certain debt
instruments used in leveraged finance
transactions may constitute ‘‘securities’’ for
the purposes of federal securities laws. When
securities are involved, institutions should
ensure compliance with applicable securities
laws, including disclosure and other
regulatory requirements. Institutions should
also establish procedures to appropriately
manage the internal dissemination of
material nonpublic information about
transactions in which it plays a role.
Compliance Function
The legal and regulatory issues raised by
leveraged transactions are numerous and
complex. To ensure that potential conflicts
are avoided and laws and regulations are
adhered to, an independent compliance
function should periodically review an
institution’s leveraged finance activity.
Additional information is available in the
Agencies’ existing guidance on compliance
with laws and regulations.
Conclusion
Leveraged finance is an important type of
financing for the economy, and the banking
industry plays an integral role in making
credit available and syndicating that credit to
investors. Institutions should ensure they do
not heighten risks by originating poorly
underwritten deals that find their way into a
wide variety of investment instruments.
Therefore, it is important this financing be
provided to creditworthy borrowers in a safe
and sound manner that is consistent with
this guidance.
Dated: March 19, 2012.
John Walsh,
Acting Comptroller of the Currency.
By order of the Board of Governors of the
Federal Reserve System, March 22, 2012.
Jennifer J. Johnson,
Secretary of the Board.
Dated at Washington, DC, this 26th Day of
March 2012.
Federal Deposit Insurance Corporation.
Valerie J. Best,
Assistant Executive Secretary.
[FR Doc. 2012–7620 Filed 3–29–12; 8:45 am]
BILLING CODE 4810–33– 6210–01– 6714–01–P

DEPARTMENT OF THE TREASURY
Bureau of the Public Debt
Proposed Collection; Comment
Request
Notice and request for
comments.

ACTION:

The Department of the
Treasury, as part of its continuing effort

SUMMARY:

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