Leveraged Transaction
Leveraged Transaction
Leveraged Transaction is a regulatory designation for financing that uses significant amounts of Leverage
Indicatively[1], a credit institution is expected to consider as a leveraged transaction any transaction that meets at least one of the conditions below:
- all types of loan or credit exposure where the borrower’s post-financing level of leverage exceeds a Total Debt to EBITDA ratio of 4.0 times;
- all types of loan or credit exposures where the borrower is owned by one or more financial sponsors
EBA Guidance
Internal Governance
As part of their policies and procedures, institutions should have[2] in place an overarching definition of leveraged transactions that takes into consideration the level of leverage of the borrower and the purpose of the transaction.
This definition should encompass all business lines and units bearing credit risk.
The scope and implementation of the definition of a leveraged transaction by an institution should be regularly reviewed to ensure that no undue exclusion has been made.
Institutions should define their appetite and strategy for leveraged transactions in a way that encompasses all relevant business units involved in such operations.
Institutions should define which types of leveraged transactions they are prepared to enter into, as well as acceptable values for parameters, such as rating note, probability of default, level of collateralisation and leverage levels, including at sector level, when relevant.
Institutions should define their risk appetite for syndicating leveraged transactions and derive a comprehensive limit framework, including dedicated underwriting limits and a granular set of sub-limits, detailing both maximum limits and the nature of transactions that the institution is prepared to participate in.
Institutions should establish a sound governance structure for leveraged transactions, enabling a comprehensive and consistent oversight of all leveraged transactions originated, syndicated or purchased by them, including, when relevant, ‘best efforts’ deals and ‘club deals’, as well as standard bilateral loans to micro, small, medium-sized and large enterprises.
Institutions should ensure that all leveraged transactions are adequately reviewed, in line with institutions’ risk appetite, strategies and policies, and approved by relevant credit decision-makers. For transactions including syndication and underwriting risks, there should be specific approval requirements and processes in place.
