The appetite of institutional investors for yield continues in the current low interest rate environment and has created renewed interest in increasing allocations to fixed income portfolios, including additional allocations to private debt.1
As a result of the heightened regulatory focus on banks and emphasis on enhanced underwriting standards for leveraged loans, investor interest has created an opportunity for non-bank institutions to provide investment opportunities to such institutional investors. Similarly, the gradual disintermediation of banking and exit from higher risk areas of lending has created opportunities for various non-bank institutions to increase their market share in respect of highly leveraged loans.
Non-bank financial institutions such as Jefferies have increased their focus on leveraged loans.2 Fund sponsors have sought to capitalize upon this opportunity through investments in private loans (either themselves making direct loans or acquiring existing loans of private companies). As of July 2015, $46 billion has been raised by funds investing in private debt, which is on track to surpass the 2014 total of $69 billion,3 and senior loan structures have raised more than $32 billion in 2014 and $16 billion through August 2015.4
Background-Leveraged Lending Guidelines
As part of an ongoing effort to regulate financial institutions, the Office of Comptroller of the Currency (the OCC), the Federal Deposit Insurance Corporation (the FDIC) and the Board of Governors of the Federal Reserve (the Fed) have issued guidance to such financial institutions in respect of underwriting and risk management standards. The guidance has evolved since 2013 and has been aimed at achieving of a number of goals relating to systemic risk. These goals include: (i) requiring institutions to create an internal definition of leveraged lending that is consistent across business lines; (ii) more uniform credit and concentration policies with limits consistent with risks; (iii) well-defined underwriting...