November 9, 2017 - The next few weeks may be chockablock with regulatory goings-on that potentially affect the loan market. We provide a watchlist below, a recent presentation (attached) and will analyze each issue as details emerge.
Leveraged Lending Guidance: As we reported, on October 19th, the GAO issued an opinion that the Leveraged Lending Guidance is a rule for the purposes of the Congressional Review Act. As rules cannot go into effect until they are submitted to Congress (and the agencies did not submit the Guidance to Congress in 2013), technically the Leveraged Lending Guidance is not in effect. (That said, it’s not clear that banks have any appetite to go wildly offsides in this period of limbo; moreover, once the agencies submit the Guidance to Congress, it goes back into effect.) The new news is that Acting Comptroller of the Currency said on Wednesday that i) the guidance should not be binding on banks (think MRAs) and ii) that there may be a joint agency statement on it in the coming weeks. We wait with bated breath.
Tax Reform: The House Republican Tax Plan has been widely debated (and tweaked) in the time since it has been introduced. The Senate Republican Tax Plan is slated to emerge on Thursday, November 9th (right as we go to print). And the two bills are reputed to be rather different. One area to watch is interest deductibility. The original 2016 Republican Blueprint recommended that net interest deductibility be eliminated to make way for immediate expensing of Capex. The current House plan caps interest deductibility at approximately 30% of EBITDA. Some of the impact areas to watch are: i) the impact on the creditworthiness of HLT borrowers (who may not benefit as much from lower corporate tax rates and who currently enjoy significant interest deductions), ii) companies’ demand for debt, and iii) the impact on the LBO market (as discussed in the WSJ).
Flood Insurance: Mandatory commercial flood insurance is an incredibly burdensome requirement for banks that are required to enforce it and it doesn’t actually raise much money for the “underwater” National Flood Insurance Program. A compromise reached between Representatives Hensarling and Scalise on the reauthorization of the National Flood Insurance Program contained a carve-out for commercial flood insurance and was to go for a vote in the House. This week, it was pulled for lack of support. Reportedly, House leadership has gone back to the drawing board to hammer out a bill that will pass. The current extension ends on December 8th.
LIBOR: On November 2nd, the FRBNY hosted an ARRC roundtable about SOFR, the proposed new reference rate for financial contracts. While much of the focus has centered on swaps, the ARRC also is beginning to consider cash markets – including loans. The roundtable presentation slides (and, soon, webcast) are available at the bottom of this page. For those not wishing to watch a four-hour webcast, S&P/LCD recapped the event. The LSTA is engaged in this process both from a documentation perspective as well as helping work toward any transition. For more information, contact mcoffey@lsta.org or tvirmani@lsta.org.
