Justin Cooper, chair of Orrick’s housing finance group, authored an op-ed on how leveraged lending guidelines should be adapted for significant loans to public entities. The article, "Commentary: How to Apply Leveraged-Loan Guidance to Public Entities," was published by The Bond Buyer. An excerpt from the article is included below.
[T]here is a nascent but observable trend toward banks making loans, including syndicated loans, to municipalities and other public agencies. Banks that used to focus on providing liquidity facilities and letters of credit, and more recently "direct purchase" products, to highly-rated issuers are now looking in some cases to make sizeable loans to lower-rated municipal entities such as cities emerging from bankruptcy, public transit and development agencies, and other types of public agencies.
Given these facts, an obvious question for many banks is how to apply the guidelines when making loans to public entities. Generally speaking, leveraged loans are frowned upon from a regulatory standpoint and banks would prefer to find that their lending activities do not constitute leveraged lending. Leveraged loans require enhanced underwriting standards for individual credits and may result in a bank being required to hold more capital or to pay higher FDIC deposit insurance premiums. Unfortunately, the Guidelines were drafted with private/corporate borrowers in mind and neither the Guidelines themselves nor any subsequent interpretations say anything about how they might be applied to public agencies.