OCC Worried About Risks in Novel Structures for Syndicated Loans

New trends in loan structures are heightening regulatory concern over syndicated credits, a key federal supervisor said Monday.

"While the levels of default risk remain quite manageable in today's environment, our concern is motivated by the amount of structural risks," said G. Scott deputy comptroller for risk evaluation.

"To be precise, we remain concerned where the pricing does not appear to adequately reflect risk."

In his keynote address to American Banker's Syndicated Loan and High Yield Debt Symposium in New York, Mr. Calhoun noted the convergence of the bank loan and high-yield-bond markets. Some loans are now arranged to more closely resemble bonds, using structures such as 10- or 12-year terms, no amortization, bullet maturities, and interest-only payments.

As the syndications market has grown, so has regulatory interest. Last year saw a record syndications volume of $888 billion, up 8.6% from 1995.

Volume this year is on track to break the $1 trillion mark. Through June, volume totaled $509 billion, Jack Yang, managing director and co-head of syndications at Merrill Lynch & Co., and chairman of the symposium, noted in his opening remarks.

Investment banks, not regulated by the Office of the Comptroller of the Currency, have played a leading role in creating some of the structural changes that concern the agency.

The OCC supervises national banks, but in the case of state-chartered banks and nonbank lenders the agency has "an opportunity to use the bully pulpit," said Mr. Calhoun.

In response to a question from Mr. Yang on the agency's view of nonbank players in the syndication market, Mr. Calhoun said, "As long as banks can underwrite equities, we don't see any problem with that."

One question yet to be answered is whether regulators can create a level playing field for bank and nonbank syndicators, which operate under different regulatory authorities and structures.

"While BankBoston welcomes the OCC's encouragement of a level playing field for commercial banks and investment banks, there is still a challenge in how to achieve this," said Mary Etta Schneider, managing director and head of syndications at BankBoston.

The Comptroller's Office believes there should be a level playing field, Mr. Calhoun said. However, he noted, "some of these other players don't have insured deposits at risk."

Echoing the December speech in which Comptroller Eugene A. Ludwig first voiced the agency's concerns about the quality of underwiting for syndicated loans, Mr. Calhoun said the OCC and other regulators will continue to closely monitor the syndicated finance market.

On March 11 the agency issued a letter to financial institutions stressing the need for adequate risk supervision for syndications in the form of policies and procedures. More detailed guidance on what risk management measures lenders should have in place will be issued this fall, said Mr. Calhoun.

(This month the Federal Reserve Board issued its own letter to lenders, focusing on the growing secondary loan market and portfolio managment issues for bank loan investors.)

"As regulators we view a robust syndicated loan market as important to the economy, to financial institutions, and their customers. If properly executed this business could be important to manage profits, for investment opportunities, and for porfolio diversifiction objectives," Mr. Calhoun said.

"However, if improperly executed there could be a high price attached," he added, "not only in the form of a financial cost, but also substantial damage ... to an institution's reputation and brand equity."

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER