The Wall Street Journal reports that the federal reserve is cracking down on risky loans which have the following characteristics:
- Lax repayment schedules.
- An absence of loan covenants.
- Debt/Cashflow (earnings before interest, depreciation and amortization) in excess of 6:1.
A crackdown may mean the regulators put the heat on Clear Channel’s banks because Clear Channel has Debt/Cashflow of 7.1. Insider considers 6.0 a good debt limit for outdoor companies because at 6.0 leverage you can retire all your debt within 7-10 years without any growth in cashflow. You never want to be in a position where you have to keep growing just of avoid a loan default.