Three longtime banks for private equity firm KKR & Co LP (KKR.N) have snubbed a request for a $725 million buyout loan over concerns it is too risky to pass muster with U.S. regulators, sources familiar with the situation said on Thursday.
The banks had funded a similar deal six months earlier.
The Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp jointly issued guidelines in March 2013 that require banks to cut down on junk-rated loans that would raise the debt levels of a company beyond certain thresholds.
Last month, regulators launched an annual examination of banks' loan books, known as Shared National Credit reviews, and stepped up enforcement of the guidelines. The reviews will likely determine to what extent banks can make exceptions to the guidelines, which have been criticized by many leveraged finance professionals as ambiguous.
In December, Morgan Stanley (MS.N), Credit Suisse Group AG (CSGN.VX) and Goldman Sachs Group Inc (GS.N) were among banks that helped finance KKR's $1.6 billion leveraged buyout of landscaping company Brickman Group Ltd. Morgan Stanley and Credit Suisse had the lead roles in that deal.
At the time, Moody's Investors Service pegged Brickman's leverage at 6.8 times its annual earnings before interest, tax, depreciation and amortization (EBITDA). Under the regulatory guidelines, leverage in excess of six times EBITDA raises concerns for most industries.
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