Regulators Find “High Level” of Risk in Syndicated Loans

Leveraged loans and loans to oil & gas companies continue to represent a large percentage of the problem credits.
Vincent RyanAugust 2, 2017

The riskiness of large syndicated bank commitments declined slightly as of the first quarter but remained elevated, according to U.S. banking regulators. The high level of credit risk is mostly due to leveraged lending practices and loans to distressed borrowers in the oil & gas sector. Regulators are concerned that loan losses could rise considerably if U.S. economic conditions deteriorate.

The review of “shared national credits” (SNCs) — loans of at least $20 million that are jointly made by three or more U.S.-regulated banks — is conducted regularly by the Federal Reserve in conjunction with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency.

The latest review, published Wednesday and based on bank examinations conducted in the third quarter of 2016 and the first quarter of 2017, found that a lower percentage of syndicated loan commitments had weaknesses — 10.3% compared with 9.7% a year ago. The improvement was in part due to better credit-risk management practices at banks, the agencies noted.

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Leveraged loans, however, made up a disproportionate share of potential problem loans. Leveraged loans constituted 74.2% of all “doubtful” loans in the SNC portfolio, for example, meaning that their collection or liquidation in full is improbable. Leveraged loans also accounted for 48.8% of nonaccrual loans, a classification that means they are uncollectible.

Bank examiners who reviewed a sample of SNCs faulted leveraged loans for having loose repayment schedules and liberal underwriting.

“Examiners noted several common weaknesses in underwriting, including ineffective covenants, liberal repayment terms, and incremental debt provisions that allow for increased debt, which may inhibit deleveraging capacity and dilute senior secured creditors,” according to the agencies’ report.

Of oil & gas credits, the agencies’ report noted that “oil supplies remain at record highs and the reductions in liquidity and unsustainable debt burdens (from excessive accumulation of second-lien and unsecured debt) have resulted in a dramatic increase in borrower defaults and bankruptcy filings. This dynamic is expected to continue through 2017.”

However, the agencies added, bank commitments to these borrowers are primarily in a senior secured position with a generally lower risk of loss.

The 2017 SNC portfolio reviewed by bank examiners included 11,350 credit facilities to 6,902 borrowers, totaling $4.3 trillion, up from $4.1 trillion in 2016. U.S. banks held the greatest volume of SNC commitments at 45.3% of the portfolio, followed by foreign banking organizations and non-bank entities.

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