Troubled Energy Market Drives Abnormally High Risk in Syndicated Credit

Credit risk in large, syndicated loans of more than $20 million remains high for this phase of an economic expansion, according to the interagency Shared National Credits Review released today. Elevated credit risk was driven by a large share of outstanding leveraged loans with weaker underwriting and the prolonged decline in prices in the oil and gas sector, which accounts for 12.3 percent of the SNC portfolio — up several points from the last review.

“The level of adversely rated assets in the SNC portfolio continues to be higher than observed in previous periods of economic expansion, leading to concern that losses could rise considerably in the next downturn,” the agencies said. However, they noted “improved underwriting and risk management practices related to the most recent leveraged loan originations as underwriters continued to better align practices with regulatory expectations.”

Total SNC commitments rose 5 percent from 2015 to $4.1 trillion in the first quarter of 2016, while outstanding SNCs rose 6.4 percent to $2 trillion. Classified assets — those rated substandard, doubtful or loss — represented 6.9 percent of the portfolio, up from 2015. Oil and gas borrowers accounted for 27 percent of the classified portfolio, compared with 16.7 percent in 2015 and 3.6 percent in 2014.

Leveraged lending was the primary contributor to the SNC portfolio’s combined special mention and classified commitment rate of 10.3 percent. Leveraged loans accounted for 72.6 percent of all special mention commitments (which are non-classified commitments that examiners flagged for concern), as well as majorities of all classified assets. The review noted that nonbanks owned 60.8 percent of all special mention and classified credits, while U.S. banks owned only 22 percent.