Credit risk for large syndicated loans remains high

Credit risk for large syndicated loans improved modestly in 2021, but remains high, according to the two Shared National Credit (SNC) examinations conducted last year and released by the Federal bank regulatory agencies on February 14, 2022.

The newly released 2021 SNC Review highlights the direction of risk in 2022 will be impacted by the continued success in managing the Covid-19 pandemic.

Other current concerns, according to the report, include inflation, supply chain imbalance, labor challenges, 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”, it stated.

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

SNC commitments with the lowest supervisory ratings (special mention and classified) have decreased from 12.4% in 2020 to 10.6% in 2021, the report finds.

The report also reveals that the recovery in commodity prices and the resulting improvement in the oil and gas sector was the driver for the lower level of special mention and classified SNC commitments.

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

Earlier this year, Federal Reserve Governor Lael Brainard said that its climate risk supervision will not include directives for banks not to lend to specific industries such as oil and gas.

The 2021 SNC 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 Covid-19 affected industries represented about one-fifth of total SNC commitments.

For leveraged borrowers also operating in Covid-19-impacted industries, non-pass loans declined slightly to 25.7%, but remain “well above” the 13.5% reported in 2019. Despite US banks holding nearly 45% of all SNC commitments, they hold only 25% of non-pass loans, the report states.

The findings reflect reviews conducted in the first and third quarters of 2021 and cover the examination of SNC loans originated on or before June 30, 2021.

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