ECB leverage rules designed with PE in mind

Private real estate and infrastructure are unlikely to be affected by the guidance, says Hogan Lovells.

The European Central Bank’s latest guidance on leveraged transactions is aimed specifically at the private equity industry, according to legal experts from law firm Hogan Lovells.

“The ECB felt that highly leveraged private equity financing needed more supervision, in particular when the leverage level exceeds six times EBITDA,” said Joerg Herwig, international counsel at Hogan Lovells, based in Frankfurt.

The guidance, published last week, requires credit institutions to conduct in-depth due diligence on the sustainability of the borrower’s debt and a risk assessment against the lender’s risk appetite in cases of a leveraged transaction. It will be implemented in November.

“Private equity will be impacted as the guidance is clearly aimed at the ‘sponsor’ industry in the documents. The ECB were seeking a level playing field with the US, who have similar rules,” added Herwig.

Not all alternative assets will be affected; the ECB guidelines exclude loans classified as “specialized lending”, such as infrastructure and real estate finance.

“Commercial real estate financing is less likely to be affected, as the provisions in real estate loan documents aren’t caught out by the guidance, but excluded as ‘specialized lending’ – you’re not trying to forecast uncertain economics like you would in other industries,” said Herwig.

The private debt market is set to benefit and debt funds are expected to increase the market share they have been gaining as banks become more cautious about leveraged lending.

“In the past 18 months or so, we have seen private debt increasingly competing with syndicated loans at the top end of the mid-market,” said Paul Mullen, a banking transaction partner at Hogan Lovells.