UBS chief warns over lending boom risks
By Peter Thal Larsen in London and Haig Simonian in Zurich
June 19 2007 22:02
The chief executive of UBS, the Swiss banking group, warned that the growing number of risky loans investment banks are making could lead to lawsuits and damaged reputations.
The warning by Peter Wuffli highlights increasing concern among senior executives that a boom in leveraged finance could drag banks into litigation and damaging disputes with clients if the credit cycle turns.
His comments, in an interview with the Financial Times, are the latest in a series of warnings by investors, bankers and regulators about loose lending standards, typified by rising amounts of leverage and the growing use of “cov-lite” loans, which lack the usual safeguards for lenders.
Mr Wuffli compared the potential consequences of the lending boom with the fallout from the stock market bubble of the late 1990s, when investment banks became embroiled in a series of accounting scandals and regulatory investigations that proved more damaging than their financial losses.
Banks that underwrite large loans typically reduce their exposure within a few months by parcelling up the loans and selling them to other investors. But Mr Wuffli said there were broader considerations: “This is potentially risky in terms of exposure to litigation, exposure to quarrels, or just plain exposure to reputation,” he said. “So financial institutions that think long-term, such as ours, do perceive a certain responsibility that includes deal terms, leverage, quality of the deals and so on.”
His views are shared by other bank executives involved in leveraged finance. “Holding your nose while you’re doing the underwriting and lending is fine if you’re just passing through town,” said the chief executive of one European bank. “But if you plan to be there any period of time, selling duff loans is not a great recipe for good business.”
UBS has been cautious about leveraged finance, though it has relaxed its lending criteria and accelerated its decision-making to put itself in a better position to compete for business with private equity groups.
Banks are under pressure from private equity groups and other borrowers to loosen lending standards, while investors are demanding exposure to products that offer an attractive return.
Some bankers fear that the growing use of “cov-lite” loans could complicate the restructuring of troubled companies by allowing them to continue operating for longer before they default.
However, others believe the loans offer borrowers greater flexibility, which will allow them to weather economic cycles.
Large private equity groups have also asked investment banks to put more of their capital at risk by underwriting portions of the equity in deals. Banks are being asked to put up short-term “bridge equity” as a condition for being allowed to participate in financing buy-outs.
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