Caution Urged on Leverage Loans : U.S. Comptroller Urges Bank Policies on Buyout Lending

The Comptroller of the Currency said today that banks should develop special policies for loans to pay for leveraged buyouts of companies as well as other transactions that involve taking on large amounts of debt.

Comptroller Robert Clarke, in a memorandum to chief executives of the 4,600 federally chartered banks in the nation that was his first substantive comment on buyouts, defended the practice of bank lending for leveraged buyouts.

He said that financing highly leveraged deals was a “legitimate banking activity, as long as a bank’s board of directors and management follow prudent banking principles to guard against unnecessary credit and legal risks.”

But Clarke said the Office of the Comptroller of the Currency “is concerned that some banks might participate in financing (highly leveraged transactions) without developing the necessary policies and procedures.”

Lending for leveraged buyouts, in which a group buys all of a company’s stock and pays for the shares by taking out large loans, has become controversial. Economists say bought-out companies may face severe difficulties in meeting loan commitments in the event of a recession, which could in turn have a serious impact on the banking industry. Federal Reserve Board Chairman Alan Greenspan has previously said that leveraged buyout lending could cause problems for banks.

The comptroller said his office, which charters and regulates national banks, earlier this year carried out a survey of the extent of their loans to help finance leveraged buyouts and similar areas.

Foreign banks had provided the primary market for many of these sales of highly leveraged instruments.