Apollo Investment Corp. (AINV:US), a lender to smaller firms that can’t tap public markets, stands to benefit as large banks face challenges meeting new underwriting guidelines, according to Ted Goldthorpe, president of the business-development firm.
“This will be a big opportunity for us over the next couple of years,” Goldthorpe said today on an earnings call. “We just haven’t seen a lot of benefits from it yet, but we do think it will be an opportunity for us in the future.”
The Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency released leveraged-lending guidelines in March 2013 after loan issuance continued to rise and underwriting practices deteriorated. The volume of new deals rose to $355.7 billion last year, a 32.5 increase from 2012, according to data compiled by Bloomberg.
“The leveraged-lending business is going to become” a challenge for investment banks, Goldthorpe said. “We are looking to partner with them in a whole bunch of different ways.”
The exclusion of “meaningful maintenance covenants” is a sign that “prudent underwriting practices have deteriorated,” the agencies said in a statement last year accompanying the release of the underwriting guidelines.
Debt levels of more than six times earnings before interest, taxes, depreciation and amortization, or Ebitda, “raises concerns,” according to the guidelines. Underwriting standards should also consider a borrower’s ability to repay and “delever to a sustainable level within a reasonable period of time,” the regulators said in the statement.
Charles Zehren, an Apollo spokesman at Rubenstein Associates Inc. in New York, declined to comment.
Leveraged loans are rated below BBB- by Standard & Poor’s and less than Baa3 at Moody’s Investors Service. (MCO:US)
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