Banks looking for a workaround that lets private equity clients borrow more debt than what government guidance allows have hit a road block.

The Federal Reserve and the Office of the Comptroller of the Currency have instructed banks to limit the amount of loans they extend to indebted companies. Some bankers have enquired whether they could substitute leveraged loans with high-yield bonds to satisfy private equity firms' thirst for leverage. Typically, these firms prefer loans to bonds because they often have more-flexible terms, such as potential early repayment, that can lower overall costs.