Regulators Remain Concerned about Syndicated Credit Risk Despite Moderate Decline

Credit risk in large, syndicated loans of more than $20 million dipped slightly but remains high for this phase of an economic expansion, according to the interagency Shared National Credits Review released today. While the agencies credited 2013 guidance on leveraged lending with improvements in credit risk overall, they attributed continued high risk levels to the distressed borrowers in the oil and gas sector.

Since the guidance was issued in 2013, “agent banks have improved their underwriting and risk management processes to reduce and manage risk of leveraged lending exposure,” the agencies noted. “In particular, most agent banks are now better equipped to project future cash flows to assess borrower repayment capacity and enterprise valuations, which better align with basic safety and soundness principles.” However, they added that persistently high levels of risk could mean that “losses could rise considerably should economic conditions deteriorate.”

Total SNC commitments rose 4.9 percent from 2016 to $4.3 trillion in the first quarter of 2017, while outstanding SNCs rose 8.2 percent to $2.1 trillion. Classified assets — those rated substandard, doubtful or loss — represented 6.6 percent of the portfolio, down from 2016. Oil and gas borrowers accounted for 26.5 percent of the classified portfolio, compared with 27 percent in 2016.

Leveraged lending was the primary contributor to the SNC portfolio’s combined special mention and classified commitment rate of 9.7 percent. Leveraged loans account for 64.9 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 56.1 percent of all special mention and classified credits — down from 60.8 percent in 2016 – while U.S. banks owned 25 percent. For more information, contact ABA’s Barry Mills.