CFO Magazine reported recently that federal banking regulators last month published revised and final guidance for financial institutions that originate leveraged loans, as part of an effort to rein in aggressive underwriting of the instruments that underpin many private equity buyouts, many of which turned out to be more risky than originally thought.
One of the areas the new regs focus on is the leverage of the borrower, i.e., the company being acquired. Debt to EBITDA ratios greater than 4 to 1 – not unusual in such transactions – will be considered highly leveraged and subject to additional conditions for regulatory purposes. What does that mean for the company being acquired in such a leveraged deal? Greater scrutiny, higher balance sheet standards, and likely higher transaction costs.
So if you’re considering such a transaction as part of your exit strategy, you should look for ways to beef up your balance sheet ahead of time. One good way is to earn higher profits. That’s where we come in. Your CFO for Rent®
