When private equity firm Hellman & Friedman proposed a $3.4 billion refinancing for Kronos Inc., a workforce management company, you might think much of Wall Street would line up to handle the deal.

Except it didn't.

The job instead went to Nomura Holdings Inc., the biggest loan deal that the Japanese bank has snared in the U.S. as it tries to muscle into the market. It marked a significant coup for a bank that just six months ago purged some senior members of its leveraged finance team in an effort to stem losses.

Why Nomura won the deal says a lot about the leveraged loan business these days — and why big banks like Bank of America, JPMorgan Chase & Co. and Credit Suisse Group (which passed on the Kronos deal) are losing market share.

A three-year-old effort by the U.S. to curb excessive risk-taking is pushing the business to financial institutions that aren't subject to regulators' lending guidelines. Nomura is one of them, because while it's Japan's biggest brokerage, it's not a federally regulated financial holding company in the U.S.

As a result of the crackdown, the top banks have shied away from doing riskier loan deals. The share of sponsor-backed loan deals carried out by the top 10 banks has fallen to almost 60%, from 85% in 2007, according to data compiled by Bloomberg. That leads to a reduction in fees that banks collect from arranging the debt.

The winners aren't just institutions like Nomura, Jefferies Group and Australia's Macquarie Group Ltd., but also investment firms like Ares Management. They are willing to take on more risk than viewed as appropriate for banks overseen by regulators.

“Larger banks are being cautious about arranging these transactions,” said Michael Zinder, partner at law firm Willkie Farr & Gallagher. “Over time you are going to see more of these alternate lenders with a seat at the table.”

A representative for Nomura declined to comment.

The leveraged lending guidelines introduced in March 2013 by the Federal Reserve and other regulators highlighted concern about a market where total outstanding debt had swelled to more than $800 billion from $130 billion in a decade.

'Riskier Credits'

Yet the unintended shift to the so-called shadow banking system carries the danger that “riskier credits are getting forced out of the banks” and onto less-regulated institutions, said Bert Ely, a banking consultant. In most cases the loans are sold off to investors seeking higher yields than is readily available these days, he said.

In the Kronos deal, Credit Suisse was the most likely choice when Hellman & Friedman, the company's private equity owner, went shopping for a banker. It sought to refinance Kronos's debt and pay itself several hundred million dollars in dividends. The Swiss bank had put together Kronos's previous financing.

Yet the bank declined the deal, according to people with knowledge of the matter. The reason: It feared regulatory backlash because of the high level of debt with the dividend payout component, they said. Representatives for Credit Suisse and Hellman & Friedman declined to comment.

Regulators generally raise concern when debt pushes a company's borrowings to more than six times a measure of its earnings. The Kronos recapitalization deal will push its indebtedness to almost 9 times that measure, according to a report last week from Moody's Investors Service analyst Raj Joshi.

Nomura was willing to take on the risk. Jefferies and Macquarie Group are also a part of the deal. It's also a deal that's considered best efforts, which means the bank doesn't have to commit to providing the debt.

The Kronos deal wasn't the first time that Nomura had scooped up business that other regulated banks stayed away from, people with knowledge of the matter said. It led an $810 million loan deal in August for Leslie's Poolmart, which is controlled by private equity firms CVC Capital Partners and Leonard Green & Partners.

In 2013, Bank of America had led the loan sale but ceded that role to Nomura in the August offering. The deal also included a dividend payment for the owners of the pool supplies company.

Just six months ago, Nomura had carried out cuts in its leveraged-finance team that included the departures of Carl Mayer, head of the team, and Mark Epley, co-chief of global financial sponsors. That was after tumult in the credit markets pushed the bank to reduce its operations in the U.S.

Now the unit is being rebuilt under Lee Olive and Garrett Carpenter, a former Bank of America Corp. veteran who joined Nomura in September 2015. The two head the bank's leveraged finance business in the Americas and have been beefing up the sales and trading staff since the April cuts.

Last Friday, Nomura began the syndication process for the Kronos deal, putting up for sale a $2.3 billion first-lien and a $1 billion second-lien loan. The deal also includes a $100 million revolving credit line for the company.

Bloomberg News

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