June 2016
AIRA Journal

In today’s regulatory regime, traditional banks have become limited in their ability to provide certain leveraged loans under lending guidelines jointly enforced by the Federal Reserve System, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, and together with the Federal Reserve and OCC. Although certain exceptions to these guidelines exist, the guidelines have resulted in limiting the ability of traditional banks to make loans deemed “risky” by federal regulators.

As a result of these new lending guidelines and the limitations placed on traditional banks, highly levered companies are being forced to turn to non-traditional financing sources. Such sources include non-bank lenders, such as hedge funds and business development companies or “BDCs.” In addition, the debt facilities provided by these alternative lenders to highly levered companies may be non-traditional, such as unitranche loan facilities. These alternative sources of financing, however, come with increased or different risks, especially when an over-levered company opts to restructure or sell itself as a part of a bankruptcy proceeding.

This article will discuss the leveraged lending guidelines, unitranche facilities and the risks associated with unitranche facilities, including with respect to “agreements among lenders” as illustrated by the recent case of In re Radio Shack Corporation.

This article is republished with permission from AIRA Journal.

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