Federal regulators criticized several Wall Street banks over the handling of a $1.15 billion loan they helped arrange for Uber this past summer, according to people with knowledge of the matter.
Led by Morgan Stanley, the banks helped the ride-sharing network tap the leveraged loan market in July for the first time, persuading institutional investors to focus on its lofty valuation and established markets rather than its losses in countries such as China and India.
The Federal Reserve and the Office of the Comptroller of the Currency (OCC), which are trying to reign in risky lending across Wall Street, took issue with the way in which the banks carved out Uber’s more mature operations from the rest of the business, the people said, declining to be named because talks with the regulators are private.
This so-called “ring-fencing” of certain markets makes companies appear a safer bet because it strips out the parts of their business that are loss-making.
Scrutiny of the Uber loan by regulators was not a surprise because it is rare for young, unprofitable technology firms to tap the leveraged loan market which is traditionally restricted to companies with long histories of generating cash.
Regulators have said that loans with more than six times leverage may receive a closer look. Goldman Sachs Group Inc, Barclays PLC and Citigroup also helped arranged Uber’s loan. Representatives of the banks declined to comment. Uber was immediately not available to comment.
Representatives for the Federal Reserve and the OCC declined to comment.
Uber does not disclose its financials but Chief Executive Travis Kalanick has said that the company is profitable in its most developed markets in the United States and Europe. The company is losing money in regions such as China, where it has been locked in a battle with rival Didi Chuxing. Last August, Uber said it would sell its China operations to Didi.
Uber spends millions of dollars to attract riders and drivers and lost more than $800 million in the third quarter, according to Bloomberg. But Uber proved a popular draw for investors because of their familiarity with its business and because it had recently closed a $3.5 billion round of financing from Saudi Arabia’s sovereign wealth fund, giving it a valuation of $62.5 billion, dwarfing that of blue-chip companies such as General Motors Company.
Debt investors usually focus on a company’s ability to generate cash, or EBITDA, relative to its debt when they are deciding whether to lend money. Uber, however, was analyzed on a loan-to-value metric, which focused on its equity valuation relative to its debt, investors said. This is not the first time that regulators have scrutinized Wall Street banks for leveraged loan transactions. Regulators have been clamping down on risky lending in the wake of the financial crisis.
Last year, regulators cautioned Goldman over risks involved in two loans totaling $1.8 billion that backed a $4 billion buyout of Ultimate Fighting Championship. Regulators had focused on accounting adjustments that inflated the mixed martial arts group’s future profitability.
So far, these warnings have not resulted in any fines but banks may avoid riskier lending in the future to avoid the possibility of any punishment from regulators.
“Increased scrutiny from the federal regulators could certainly prompt banks to reduce the supply of credit in the leveraged loan markets,” said Shawn Thomas, a professor at the University of Pittsburgh’s business school who has written about leveraged lending.
Banks are often willing to help raise debt for high profile companies, even if the deal risks regulatory scrutiny, because they hope to land a role in their eventual initial public offerings.