NEW YORK, Jan. 22 (UPI) -- Washington's financial oversight agencies are steering banks away from financing mergers that involve high amounts of debt, a senior regulator said.
Office of the Comptroller of the Currency and the Federal Reserve warned banks in the late summer of 2013 that stricter guidelines would be applied to high-debt acquisitions and that banks could face repercussions for financing high-risk deals.
"As regulators, we certainly hope to change bad practices and remove the extraordinary froth that's experienced at the peak of a credit cycle. If we can mitigate that, it reduces the size of the valley to follow," said OCC senior deputy Martin Pfinsgraff.
The Wall Street Journal reported Wednesday that several big banks have avoided getting involved in deals that might incur Washington's wrath.
Citigroup recently sidestepped involvement in KKK & Co.'s $1.6 billion deal to buy Brickman Group Ltd., a commercial landscaping firm.
The debt to earnings before interest, taxes, depreciation and amortization (or Ebitda) ratio was 6.8 to 1, above the new federal guideline of a maximum debt to Ebitda ratio of 6 to 1, the Journal said.
For Citigroup, that meant walking away from a potential fee of $10 million.
But such decisions may become more frequent. Bank of American and JPMorgan & Chase both walked away from a chance to finance part of Carlyle Group's $4.15 billion acquisition of a blood testing business division owned by Johnson & Johnson, the Journal said.
Both deals were financed by other lenders that either interpreted the rules differently or were under contractual obligations to do so with contracts signed before regulators sent their warning notices, industry analysts said.
The stricter policy could curtail more than a few Wall Street deals. In 2013, 27 percent of the major acquisitions involved debt-to-Ebitda ratios that were higher than the new guidelines permit.
That percentage is half what it was in 2007, before the great recession, S&P Capital IQ LCD said.
