Leveraged Loan Underwriting Has “Serious Deficiencies”

Leveraged loans show evidence of "risk management weaknesses," including dated valuations and poor credit analysis, regulators said in an annual re...
Vincent RyanNovember 10, 2014
Leveraged Loan Underwriting Has “Serious Deficiencies”

Federal U.S. banking agencies were highly critical of the credit quality of large syndicated loans in their annual analysis released Friday.

The so-called Shared National Credits Review, an examination of loans of at least $20 million shared by three or more banks, found that credit risk in the $3.39 trillion portfolio remained high, and that some leveraged loans in particular had “serious deficiencies in underwriting standards and risk management.”

The SNC review found that the volume of “criticized” assets remained elevated at $340.8 billion, or 10.1% of total loan commitments, “approximately double pre-crisis levels.”

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“The stagnation in credit quality follows three consecutive years of improvements,” said the joint report issued by Federal Reserve Board, Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency.

A criticized asset is a loan with payment terms in arrears and that falls into one of our buckets: special mention, substandard, doubtful, or loss. Leveraged loans as reported by agent banks totaled $767 billion, or 22.6% of the 2014 SNC portfolio and accounted for $254.7 billion, or 74.7%, of criticized SNC assets, the agencies said.

Financial institutions participating in leveraged loans need to strengthen compliance with March 2013 federal guidance, the report said, “including provisions addressing borrower repayment capacity, leverage, underwriting and enterprise valuation.”

“Examiners noted risk-management weaknesses at several institutions engaged in leveraged lending including lack of adequate support for enterprise valuations and reliance on dated valuations; weaknesses in credit analysis; and overreliance on sponsor’s projections,” the agencies said. As a result, the agencies said they would increase the frequency of leveraged lending reviews.

Total SNC commitments increased 12.6% from the 2013 review, according to the report. The distribution of credits across entity types — U.S. bank organizations, foreign banks and nonbanks —remained relatively unchanged. U.S. bank organizations owned 44.1% of total SNC loan commitments, FBOs owned 33.5%, and nonbanks owned 22.4%.

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