Federal regulators are growing increasingly concerned about the vulnerability of banks participating in "leveraged buyouts," or corporate takeovers in which the buyer uses mostly borrowed funds to make the acquisition.
A spokeswoman for the Office of the Comptroller of the Currency, which regulates 4,450 nationally chartered banks, said Tuesday that the agency's examiners will receive new guidelines within the next several weeks requiring them to evaluate financial institutions' risk from making loans in leveraged buyouts."We want to make sure banks are doing a very careful analysis of exactly what the risks are," spokeswoman Lee Cross said.
Leveraged buyouts have become increasingly common in recent years amid an explosion of corporate takeovers.
Two weeks ago, Federal Reserve Board Chairman Alan Greenspan, whose agency regulates bank holding companies, told the Senate Banking Committee he has warned banks making leveraged buyout loans to consider borrowers' prospects "in a range of economic and financial circumstances."
L. William Seidman, chairman of the Federal Deposit Insurance Corp., which insures commercial bank deposits, has said the proliferation of leveraged buyouts is increasing the risk to the financial system.
In a leveraged buyout, such as Kohlberg Kravis Roberts & Co.'s $20.6 billion bid for RJR Nabisco Inc., an investment group uses mostly borrowed money to purchase a company. The debt is repaid either with the acquired company's cash flow or with money raised by the sale of some of its assets.
Often the investors are the target company's managers, who are acting to thwart a threatened takeover by outsiders.
The popularity of such deals and the resulting mushrooming of debt has led to concern about the ability of debt-burdened companies to withstand an economic downturn.
Critics of the financing trend say most of the deals have been put together since 1982, when the economy began expanding, and have not been tested by a recession.
If a highly capitalized company suffers a downturn, the value of its stock falls. However, a highly leveraged company could be forced into bankruptcy after a setback to pay creditors.
According to Loan Pricing Corp., a New York company that monitors large bank loans to corporations, banks have lent $70 billion to highly leveraged transactions since mid-1987. Leveraged buyout and takeover lending comprised 59 percent of the banks' big corporate loans in the July-September quarter.
Cross said the comptroller's office began revising its leveraged buyout guidelines after surveying the practices of 11 large money center banks and five regional institutions in late spring and early summer.