When is a loan a bond, and when is a bond a loan In the world of leveraged buyout finance, it can end up being something of a judgement call. But it’s a judgement call you’d better get right, and certainly one that you’d better justify to the finance department. Otherwise you might end up in the unenviable position that James Boland, until recently head of leveraged finance for UBS in the Americas, currently sits in.
It looks like a little bit of the get-er-done attitude went wrong here. The transaction in question was a fairly standard financial sponsors deal – UBS was to underwrite a bond to finance some oil and gas assets for a private equity firm. At some point during the deal, it became clear that the borrowing entity wasn’t going to be able to meet the disclosure requirements for a bond prospectus, though. The financing would need to be structured as a syndicated loan.
The bankers seem to have thought “no harm, no foul” – since the actual credit risk was the same and the investor base were prepared to go along with the syndication, there was no need to slow everything up with another meticulous trip through all of the approvals committees. They closed the loan agreement, sold the debt to investors (in the form of loan participations rather than bonds) and booked the deal.
This was actually a pretty bad mistake though. The Federal Reserve is currently nervous about the leveraged loan market and has introduced quite strict underwriting guidelines and reporting requirements for banks that make them. Even though UBS intended to (and did) sell on all of its participation in this loan, it spent some time on the bank’s balance sheet, and so a report ought to have been filed recording the leveraged loan, and confirming its compliance with the guidelines. Intentionally or otherwise, the bankers may have put their bosses (if they hadn’t been quickly found out) in the position of accidentally lying to the regulators.
It looks like a piece of old-fashioned detail-blurring and corner-cutting, of the sort that used to be the daily business of UBS investment banking, but which hasn’t been tolerated since the new compliance era brought in by Sergio Ermotti and Andrea Orcel. A change from bond to loan is clearly a material change to the terms of the deal; it might even be something that the client could be expected (gasp) to pay for. Trying to sweep it under the carpet in order to keep the deal flow is an indication that, once more, financial sponsors clients have all of the market power and banks have no material gatekeeper role over the transactions that take place, a pretty frightening conclusion for regulators to reach. Meanwhile, the FINRA file shows that this case is currently in arbitration – perhaps the full facts aren’t public and there’s some extra piece of evidence that Mr Boland and his colleague tried to do the right thing. But in the absence of that, it looks like the sort of mistake even junior bankers are warned against. In this industry, attention to detail is crucial.
Separately, after the first few finance classes in business school, there’s usually at least one person wondering “why can’t you finance business school with equity rather than debt?”. Several attempts have been made to design a financial product that does this, although most of them have failed for one reason or another. A new generation of “Income Sharing Arrangements” are being marketed at prestige American undergraduate schools like Purdue now, though, with the investor upside capped at 2.5x the amount borrowed to stop students feeling gouged, and with repayment percentages determined by your choice of major.
The math feels like it’s more tailored to the nonfinancial world, looking at the pricing examples given. For a finance student borrowing $10,000, for example, FlowPoint Capital Partners LP would be expecting 3% of your salary, for 96 months after graduation. In an investment banking career, that sounds like it would be a pretty bad deal – you’d hit the 2.5x cap long before the eight year mark. Although …what if you were a little bit uncertain about whether you were going to make it and didn’t want a debt millstone hanging round your neck if you failed? An obligation to pay 3% of your yoga teaching earnings might feel easier to live with than ten thousand of undischargeable debt.
The banking industry boycott of Brunei-owned luxury hotels is solidifying, with Deutsche, Goldman, Citi, Jeffries and Nomura all on board so far. No more deals being closed at the Dorchester Grill for the foreseeable future. (Financial News)
Significant job losses clearly to come at SocGen, but they do raise the question – after so many rounds of cost cutting and strategic rethink, is there really any fat left to trim? Removing 1,600 of headcount cannot be done just by weeding out unproductive employees; it is going to involve tough choices about currently borderline viable businesses (Breaking Views)
The Patagonia fleece story is official – they will only be producing branded vests for organisations that fit their outdoor brand a bit better than “it can get cold under the AC on the trading floor”. Opinion seems to be divided as to whether another iconic brand (Carharrt has been suggested) will step in to the Wall Street niche, or whether this may mark the beginning of the end of the fleece vest era in finance bro fashion itself (Wall Street Journal)
UK companies (including five law firms and an insurance broker) are using a strange AI product called Isaak to monitor who their employees collaborate with, which ones are “influencers” and so on (Guardian)
An example of why the regulators want you to do the paperwork on leveraged loans – Credit Suisse and Jeffries have been burned when the buyout loan for an Israeli security company proved difficult to syndicate due to concerns that the company’s product might have been used to spy on Jamal Khashoggi (FT)
Commerzbank management are trying to calm employee representatives on the supervisory board, but they may be ambushed with a vote to abandon the merger in the next few days (FT)
Nomura’s Chief Risk Officer is leaving the company, along with a long list of senior sales and trading names (Bloomberg)
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