BoE vs LBO

Buyout barons make a tricky target for Carney

Buyout barons may prove a tricky target for Mark Carney. The Bank of England governor could follow US authorities in tightening lending rules for loans backing leveraged buyouts by private equity firms. The sentiment is noble, and the American model could be improved. But taming animal spirits is hard when markets are global and banks' influence is waning.

Central banks worry about raising rates while growth is slow, yet they know loose policy fuels asset bubbles. One answer - recently endorsed again by Federal Reserve Chair Janet Yellen - is to lean on "macroprudential" tools, like the tighter lending standards the BoE is trying to use to cool the UK's property market.

After houses, bankers worry the Old Lady of Threadneedle Street may next turn her sights to the leveraged finance market. Things certainly look bubbly: debt on new European leveraged loans hit 6.3 times Ebitda in the second quarter of 2014, the highest on record save for the third quarter of 2007, according to Thomson Reuters LPC data. And there is a Stateside precedent. Last year three US agencies set guidelines for banks arranging leveraged loans, capping leverage at six times Ebitda.

However, this ratio is a crude measure of risk. Some kinds of companies can easily handle more, others struggle with far less. So it might be better to stress borrowers' ability to repay debt, even if interest rates rise and revenue falls - much as the BoE has done with homeowners. The Bank could also insist on minimum loan standards, perhaps curbing so-called "covenant-lite loans," which dispense with debt and cashflow limits.

Whether the BoE succeeds depends on whether it merely aims to make banks safer, or to limit wider market exuberance. The US policy has done more on the first count than the second.

The same probably holds in Britain. Banks are already in retreat, with funding increasingly coming from bond markets and institutional loan investors. And forcing new standards on London lenders could divert more business to offshore rivals or to less-regulated shadow banks. While the rush for yield continues, LBO shops will find buyers for their debt.