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Trlpc highly leveraged us loans continue unabated


Banks keep underwriting highly leveraged loans for low-rated companies that are drawing U.S. regulators' attention, Thomson Reuters LPC data show, despite a looming review by the federal agencies that are trying to clamp down on these transactions. There has been no let-up in deals that could run afoul of year-old regulatory hurdles, which require banks to hold more reserves and possibly pay fines, in the weeks leading up to reviews of their loan portfolios by the Office of the Comptroller of the Currency, the Federal Reserve and Federal Deposit Insurance Corp. Bankers expect the annual Shared National Credit (SNC) quality reviews to help clarify how regulators will treat various leveraged loans. Warning letters were sent to some banks last year urging compliance with Leveraged Lending Guidance published in March 2013, which is designed to avoid the type of systemic risk spurred by the originate-to-distribute mortgage loan market. Bankers say that the guidelines are driving more judicious underwriting decisions, but 13 of the largest corporate leveraged buyout deals in the first quarter carried debt-to-Ebitda ratios of 6.24 times, on average, the LPC data show. This is above the 6.0 times leverage that regulators deem as "criticized" assets that could spark penalties, but below 6.47 times in the fourth quarter of 2013. Leverage ratios averaged 6.21 times in full-year 2013, the highest since a pre-recession peak of 7.05 times in 2007. Still grapplingBankers are still grappling with which highly leveraged deals to underwrite to stay beneath regulators' radar after receiving the warning letters in the second half of 2013.

Arranging banks say they are choosing carefully, particularly on deals that may be criticized, and seeking more detail on exceptions to the guidelines that cover what banks underwrite and hold as well as distribute."If you ask everyone if there are deals you have been less aggressive on, the answer is yes," one banker said. "Chances are those are deals where we're not M&A advisers and we may not have that great a position with the client going forward," he added."I don't think there's been a deal that should have gotten done that didn't get done," the banker said. "I think it has started to affect behavior, but the amount of deals getting done in the market? No."Banks are willing to do some criticized deals, but are wary not to have too many criticized loans in their portfolios. Decisions are often linked to fee-earning potential and relationships with private equity firms and the companies being bought. As the second quarter begins, several new deals carry leverage in the 6.0-7.5 times area. These include Checkout Holding Corp, the borrower for marketing information provider Catalina Marketing's buyout; GYP Holdings, holding company of wallboard distributor Gypsum Management and Supply; and Renaissance Learning, which provides online assessments and data-powered teaching tools.

Bankers will soon know which tactics are optimal."The SNC review will get started later this spring, regulators will review data in the late summer and the public report is typically published in the fall," said OCC spokesman Bryan Hubbard. The OCC declined to comment on the leverage ratio data. The review gauges the credit quality of large loan commitments owned by U.S. banks, foreign banking organizations and nonbanks.

Heavy competitionInsatiable investor demand for new U.S. leveraged loans is creating aggressive market conditions, pricing and deal structures. High purchase price multiples have boosted debt loads and leverage ratios for corporate buyouts in the first quarter, and that trend could continue."With fewer auctions and not a ton of opportunities, sponsors are competing heavily for the deals available, which is driving purchase price multiples higher and therefore leverage may go up as well," said Ioana Barza, Thomson Reuters LPC's director of analysis. It is too early to assess the long-term impact on underwriting, however, particularly with the review pending, bankers and analysts agree."Sponsors may opt not to do deals due to high valuations and high purchase prices and pursue refinancing to reduce borrowing costs on existing debt or dividend recaps to take money off the table," she said. While bankers hash through a heap of new regulations crafted to avert a repeat financial crisis, and to protect investors, a hunger for extra yield keeps luring those investors to higher-risk assets including leveraged loans. Loan mutual funds, a measure of retail demand and exposure, are reaching an unbroken stretch of inflows nearing two full years. The pace of CLO fund issuance, a reflection of institutional demand for the loans, is accelerating monthly this year as regulatory uncertainties specific to CLOs are being clarified. This has made for an ongoing borrower-friendly market for low-rated companies taking loans with fewer investor protections. For now, the U.S. leveraged loan default rate is low, ending the first quarter at 1.4 percent, down from 2.2 percent the prior quarter and 3 percent in the first quarter a year ago, Moody's said in a report. "We believe the default rate will stay low as long as liquidity remains ample and distressed companies are able to access the market."

Your money can comic books teach kids money smarts


It's a bird, it's a plane, it's a ... financial planner?The next time your kid brings home a comic book, it might not be just about battles, explosions and good versus evil. Instead, it might be about evaluating wants versus needs, living within your means and creating emergency funds. That is because financial services company Visa Inc has partnered with Marvel Comics to create "Rocket's Powerful Plan," a new comic book starring the superhero team Guardians of the Galaxy. The comic is slated to be sent to every public library in the United States, and there are more than 150,000 copies printed in eight languages. The theme: why it makes sense to cultivate money smarts. "The challenge was to create a fun, action-packed story while also including a lesson on personal finance," said Darren Sanchez, an editor at Marvel. "Trying to squeeze educational information into a story can be tough, especially with a topic like money management. To make it work you have to be careful not to overwhelm the story."After all, as any parent knows, children listen to very little of what you have to say, especially when it comes to money. When it is the Guardians of the Galaxy who are talking (Rocket, Groot, Star-Lord, Gamora, and Drax the Destroyer), they are more likely to actually pay attention. So who is the Suze Orman of the superhero world, dispensing personal finance advice while defeating powerful foes at the same time? Turns out it is Rocket, an intelligent raccoon, who is voiced by Bradley Cooper in the recent big-screen film. When the squad receives a fee for exterminating robopests, Rocket suggests putting some of that money aside for an emergency fund. That cash later comes in handy when the group has to repair their spaceship, and purchase high-tech weapons to vanquish their enemies. (Sorry about the spoilers.)

The comic is the second such venture by Visa. The original, produced in 2012, featured the Avengers and Spider-Man tossing off money advice. It proved to be so popular with educators that more than half a million copies were eventually printed. This time, in addition to the Guardians of the Galaxy, look for cameos by Ant-Man, Iron Man, Thor, Black Widow and Hulk. It was produced in languages including English, Spanish, Mandarin, Japanese and Malay."We wanted simple messages that kids could latch on to and take out of it, like saving for a rainy day," said Hugh Norton, Visa's head of financial education. "Issues like emergency savings are extremely important, and something we can drill into kids from an early age."On the back of the comic book, kids will find interactive games like word searches, where they can try to locate terms like "budget," "currency" and "goal," for example. There is also a wants-versus-needs challenge. Should you spend money on necessities like "water" and "a place to live," or luxuries like "video games" and "candy"? (On second thought, kids, do not answer that.)

Judging from a recent survey, it seems like parents could indeed use all the help they can get in explaining money topics to kids. ALMOST AS 'BAD' AS DEATH AND SEX In the annual "Parents, Kids & Money" survey by Baltimore-based money managers T. Rowe Price Group Inc, more than half of parents admitted they were "somewhat," "very" or "extremely" reluctant to talk about financial issues with their children. The only subjects they were more reluctant to talk about? Death and sex.

And 44 percent have not talked to their kids at all about financial subjects including long-term investing, market volatility, or financial statements. That is where a money-oriented comic book like "Rocket's Powerful Plan" could come in handy. In the past Visa has tried out other innovative avenues to reach out to kids, as well, such as sponsoring financial literacy-themed National Football League games. Marvel has put its deep bench of superheroes to work on other custom projects, as well, including for Netflix Inc, Walt Disney Co's Disney Interactive, ESPN and the Make-A-Wish Foundation. Even superheroes are not immune from the financial challenges of parenthood, by the way. In Visa and Marvel's new comic, when Ant-Man gets a cut of the fee from the Guardians of the Galaxy for helping eliminate their enemies, what does that cash go toward?Purchasing a drum set for his daughter.