Tag: Leverage


Acquisition Financing: the Year Behind and the Year Ahead

Eric M. Rosof is a partner focusing on financing for corporate transactions at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Rosof, Joshua A. FeltmanGregory E. Pessin, and Michael S. Benn.

Last year’s robust acquisition financing market helped drive the headline-grabbing deals and record volume of M&A in 2015. At the same time, credit markets were volatile in 2015 and appeared to have shifted fundamentally as the year went on—and with them, the types of deals that can get done and the available methods of financing them. U.S. and European regulation of financial institutions, monetary policy, corporate debt levels and economic growth prospects have coalesced to create a more challenging acquisition financing market than we’ve seen in many years. As a result, 2016 is likely to be a year that demands creativity from corporate deal-makers, and where financing costs, availability and timing have significant influence over the type, shape and success of corporate deal-making.

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Designated Lender Counsel in Private Equity Loans

Jason M. Halper is a partner in the Securities Litigation & Regulatory Enforcement Practice Group at Orrick, Herrington & Sutcliffe LLP. This post is based on an Orrick publication by Mr. Halper and Rob McKenna.

Recent media reports have expressed alarm at the use of “designated lender counsel” in private equity-sponsored leveraged loan transactions. [1] The phrase refers to the practice of a private equity firm instructing the investment bank arranging its syndicated loan as to which law firm the private equity firm would like the investment bank to use as the bank’s counsel. According to the press reports, the practice (also known as “sponsor designated counsel”) has become prevalent in the syndicated loan market. The question raised in the press is whether this practice creates a material conflict of interest, because the law firm representing the investment bank arguably generates fees based on the strength of its relationship with the private equity firm across the table. If it does, the next question is whether that conflict could be argued to adversely affect the lending arrangement, with potential negative consequences for investors in the loan.

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Proposed Rule on Registered Funds’ Use of Derivatives

David C. Sullivan is partner in the Investment Management practice at Ropes & Gray LLP. This post is based on a Ropes & Gray publication by Mr. Sullivan, Tim Diggins, George Raine and Sarah Clinton.

On December 11, 2015, the SEC issued its long-anticipated release (the “Release”) proposing Rule 18f-4 (“the “Proposed Rule”) under the 1940 Act regarding the use of derivatives and certain related instruments by registered investment companies (collectively, “funds”). The stated objective of the Release is to “address the investor protection purposes and concerns underlying section 18 [of the 1940 Act] and to provide an updated and more comprehensive approach to the regulation of funds’ use of derivatives” in light of the increased participation by funds in today’s large and complex derivatives markets.

We provide an executive summary of the Proposed Rule and other aspects of the Release below and, in the Appendix of the complete publication, we discuss the Proposed Rule in more detail.

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Chair White Statement on Use of Derivatives

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. The following post is based on Chair White’s remarks at a recent open meeting of the SEC, available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

The Commission will consider two separate recommendations from the staff today [December 11, 2015]. First, we will consider and vote on a recommendation from the staff of the Division of Investment Management to propose an updated and more comprehensive approach to the use of derivatives by mutual funds and exchange-traded funds, closed-end funds, and business development companies.

Second, we will consider and vote on a recommendation from the staff of the Division of Corporation Finance to propose rules to require disclosure of certain payments made to governments by resource extraction issuers, as mandated by the Dodd-Frank Act.

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Fed’s Proposed Amendments to Capital Plan & Stress Test Rules

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Mike Alix, Adam Gilbert, and Armen Meyer.

On July 17th, the Federal Reserve Board (“Fed”) issued a proposed rule that provides some relief from capital stress testing requirements. [1] Most notably, it eliminates advanced approaches risk-weighted assets and tier 1 common capital (“T1C”) calculations from stress testing, and provides a one year delay in the application of the supplementary leverage ratio (“SLR”) to stress testing. The proposal also does not incorporate the G-SIB surcharge into stress testing at this stage—see PwC’s First take: Key points from the Fed’s final G-SIB surcharge rule (July 22, 2015)—and makes clear that no additional changes will be applied to next year’s stress testing cycle.

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A Century of Capital Structure: The Leveraging of Corporate America

The following post comes to us from John Graham, Professor of Finance at Duke University; Mark Leary of the Finance Area at Washington University in St. Louis; and Michael Roberts, Professor of Finance at the University of Pennsylvania.

In our paper, A Century of Capital Structure: The Leveraging of Corporate America, forthcoming in the Journal of Financial Economics, we shed light on the evolution and determination of corporate financial policy by analyzing a unique panel data set containing accounting and financial market information for US nonfinancial publicly traded firms over the last century. Our analysis is organized around three questions. First, how have corporate capital structures changed over the past one hundred years? Second, do existing empirical models of capital structure account for these changes? And, third, if not explained by existing empirical models, what forces are behind variation in financial policy over the last century?

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FSOC: Are Asset Managers’ Products and Activities Creating Systemic Risk?

The following post comes to us from Debevoise & Plimpton LLP and is based on a Debevoise & Plimpton Client Update.

In connection with its ongoing evaluation of the asset management industry, the U.S. Financial Stability Oversight Council (the “FSOC”) recently issued a notice seeking public comment (the “Notice”) on whether asset management products and activities may pose potential risks to U.S. financial stability. [1] Specifically, the FSOC seeks comment on the systemic risks posed by: (1) liquidity and redemption practices; (2) use of leverage; (3) operational functions; and (4) resolution, i.e., the extent to which the failure or closure of an asset manager, investment vehicle or an affiliate could have an adverse impact on financial markets or the economy. Comments on the Notice must be submitted by February 23, 2015; and we are working with several clients to prepare and submit such comments. This post summarizes some of the FSOC’s key concerns and questions outlined in the Notice.

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US Basel III Supplementary Leverage Ratio

The following post comes to us from Luigi L. De Ghenghi and Andrew S. Fei, attorneys in the Financial Institutions Group at Davis Polk & Wardwell LLP, and is based on a Davis Polk client memorandum; the full publication, including diagrams, tables, and flowcharts, is available here.

The U.S. banking agencies have finalized revisions to the denominator of the supplementary leverage ratio (SLR), which include a number of key changes and clarifications to their April 2014 proposal. The SLR represents the U.S. implementation of the Basel III leverage ratio.

Under the U.S. banking agencies’ SLR framework, advanced approaches firms must maintain a minimum SLR of 3%, while the 8 U.S. bank holding companies that have been identified as global systemically important banks (U.S. G-SIBs) and their U.S. insured depository institution subsidiaries are subject to enhanced SLR standards (eSLR).

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US Regulatory Outlook: The Beginning of the End

The following post comes to us from Dan Ryan, Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP, and is based on a PwC publication. The complete publication, including appendix and footnotes, is available here.

Regulatory delay is now the established norm, which continues to leave banks unsure about how to prepare for pending rulemakings and execute on strategic initiatives. With the “Too Big To Fail” (TBTF) debate about to hit the headlines again when the Government Accountability Office releases its long-awaited TBTF report, the rhetoric calling for the completion of these outstanding rules will once more sharpen.

This rhetoric should not be confused with reality, however. At about this time last summer, Treasury Secretary Lew stated that TBTF would be addressed by the end of 2013—a goal that resulted in heightened stress testing expectations and a vague final Volcker Rule in December, but little more. Since then, the slow progress has continued, with only two key rulemakings completed so far this year: the finalization of Enhanced Prudential Standards for large bank holding companies (BHCs) and a heightened supplementary leverage ratio for the eight largest BHCs (i.e., US G-SIBs).

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US G-SIB Leverage Surcharge and Basel III Leverage Ratio

The following post comes to us from Luigi L. De Ghenghi and Andrew S. Fei, attorneys in the Financial Institutions Group at Davis Polk & Wardwell LLP, and is based on a Davis Polk client memorandum; the full publication, including visuals, tables, and flowcharts, is available here.

The U.S. banking agencies have finalized higher leverage capital standards for the eight U.S. bank holding companies that have been identified as global systemically important banks (“U.S. G-SIBs”) and their insured depository institution (“IDI”) subsidiaries. The agencies also proposed important changes to the denominator of the U.S. Basel III supplementary leverage ratio (“SLR”). A number of these proposed changes are intended to implement the Basel Committee’s January 2014 revisions to the Basel III leverage ratio.

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