A cap on certain leveraged lending has been in place in the USA for nearly four years. The maximum leverage for deals funded by regulated entities is set at 6x EBITDA, although there is a level of confusion on the rules and they can be manipulated using adjusted EBITDA.
In Europe, the ECB published its own draft guidelines on leveraged lending for consultation in November 2016. Interested parties were able to input their views until late last month. The ECB's interest in regulation was driven by the results of its survey of 40 banks last year that revealed a 35% increase in risky loans between 2012 and 2015 and that, in the ECB's opinion, leveraged loan markets had a supply/demand imbalance which have led to low interest rates and borrower-friendly terms.
Private Equity News states that up to 20% of European PE deals could be affected, with the larger deals (where high leverage is available) being impacted. It has also said that as a result of differences in the US and European rules, PE houses this side of the pond could be disadvantaged.
European guidelines are expected to be implemented in H2 of 2017.
The European Central Bank is expected to finalise the leverage cap in H1 2017 The European Central Bank’s proposal to impose a cap on debt used in private equity buyouts at six times company earnings will limit the proportion of bank debt used in buyouts on the continent and could make private equity firms in the region less competitive.