The Fall of Commercial (Wholesale) Underwriting

Standards

Kevin M. Blakely

The Risk Management Association

Purchase Price multiples

Copyright@2007 Standard & Poor’s, a division of The McGraw-Hill Companies, Inc.

Total debt to EBITDA multiples

Copyright@2007 Standard & Poor’s, a division of The McGraw-Hill Companies, Inc.

Spread per unit of leverage

Factors Contributing to decline in Underwriting Standards

Low Interest Rates

Rise of Private Equity Funds

Growth in private equity since 1992

Source: Merrill Lynch, Somerset Capital Limited, Watson Wyatt estimates.

Factors Contributing to decline in Underwriting Standards

Originate to Distribute Model

CLOs

Low Interest Rates

Rise of Private Equity Funds

The Fallout

Credit Crunch

Banks Tighten Internal Procedures

More Pain to Come

Increased Regulatory Interest

Summary 

Underwriting standards Slipped to Unprecedented Levels

New Forces at Work

Expect a strong regulatory response