Credit risk for large syndicated loans remains high

Credit risk for large syndicated loans improved slightly in 2021 but remains elevated, according to two Shared National Credit (SNC) reviews conducted last year and released by federal banking regulators on February 14. 2022.

The recently released SNC 2021 review highlights that the direction of risk in 2022 will be affected by the continued success in managing the Covid-19 pandemic.

Other current concerns, according to the report, include inflation, supply chain imbalance, labor issues, high debt levels and vulnerability to rising rates that could “negatively impact the financial performance and repayment capacity of borrowers in a wide variety of industries”, he stated.

The SNC program assesses the risk of the largest and most complex credits shared by multiple regulated financial institutions and is governed by an interagency agreement between the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency.

SNC engagements with the lowest watch ratings (Special Mention and Classified) declined from 12.4% in 2020 to 10.6% in 2021, according to the report.

The report also reveals that the recovery in commodity prices and the resulting improvement in the oil and gas sector was behind the lower level of special mentions and SNC ranked engagements.

However, according to the agencies, the improvement in oil and gas was partially offset by the year-over-year weakening of commercial real estate, particularly in the hotel, office and office sub-sectors. and retail.

Earlier this year, Federal Reserve Governor Lael Brainard said his climate risk watch will not include guidelines banning banks from lending to specific sectors such as oil and gas.

The SNC 2021 portfolio included 5,764 borrowers, totaling $5.2 trillion in commitments, up 2.1% from a year ago.

According to the report, nearly half of total SNC commitments are leveraged loans, and commitments to borrowers in industries affected by Covid-19 accounted for about a fifth of total SNC commitments.

For leveraged borrowers also operating in sectors affected by Covid-19, non-pass loans fell slightly to 25.7%, but remain “far above” the 13.5% reported in 2019. Although US banks hold nearly 45% of all SNC commitments, they only hold 25% of non-performing loans, the report said.

The findings reflect reviews conducted during the first and third quarters of 2021 and cover the review of SNC loans issued on or before June 30, 2021.

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