Leveraged Lending

Policies and Procedures on Loan Acquisition and Distribution

Market disruption can impede the ability of an agent (originating) bank to consummate syndications or otherwise sell down loan exposures. As a result, the bank, as agent, may have to hold higher-than-planned exposure levels. Banks should develop procedures for defining and managing distribution fails, which are generally defined as an inability to sell down the exposure within a reasonable distribution period (generally 90 days).

Agent banks should clearly define their hold level before syndication efforts begin in accordance with accounting guidance. Generally accepted accounting principles require that loans originated with the intent to sell, with the exception of those loans for which the institution has elected to account at fair value under the fair value option, must be carried on the bank’s books at the lower of cost or market (LOCOM). In addition, loans transferred to the “Held for Investment” portfolio that were originated with the intent to sell must be transferred at LOCOM. Methodologies used by the bank to establish carrying and transfer values should be closely reviewed for compliance with accounting guidance and reasonableness.

Institutions should adopt formal policies and procedures addressing the distribution and acquisition of leveraged financing transactions. Policies should include:

Procedures for defining, managing, and accounting for distribution fails.

Identification of any sales made with recourse and procedures for fully reflecting the risk of any such sales.

A process to ensure that purchasers are provided with timely, current financial information.

A process to determine the portion of a transaction to be held in the portfolio and the portion to be held for sale.

Procedures and management information systems (MIS) to identify, control, and monitor syndication pipeline exposure.

Limits on the length of time transactions can be held in the held-for-sale account and policies for handling items that exceed those limits.

Reasonable and consistently applied methodologies for determining market values and prompt recognition of losses for loans classified as held-for-sale in accordance with generally accepted accounting principles.

Procedural safeguards to prevent conflicts of interest for both bank and affiliated securities firms.

Procedures defining control, independence, and limits on an affiliate’s equity interests in leveraged transactions.

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