About two-thirds of amendments to syndicated loan agreements in December were for borrowers that broke or were about to break the original terms, according to a report by BankAmerica Corp.
The finding, culled from public documents, suggests that many corporations that failed to meet financial targets were forced back to the negotiating table with their creditors.
Of 11 amendments reported in December, seven included covenant relief-an amount equal to all such amendments reported for the previous five months combined. Covenant relief occurs when lenders restructure deals for borrowers that are in danger of violating the terms of their original loan agreements.
The study also revealed that banks are being paid to adjust the terms of loans. That is an encouraging sign for regulators and other observers concerned about lending standards.
"We viewed it as an advantage of loans as an asset class compared to bonds, because if anything changes, you get to reprice the deal," said the report's co-author, Michael H. Rushmore, a loan analyst with BankAmerica.
According to the study, lenders that amended loan agreements in December were paid 10 to 25 basis points of the total loan amount for the changes. On top of that, lenders amending agreements negotiated eight times the price increase they had commanded from borrowers in September.
Mr. Rushmore said the survey offers encouraging news about credit risk- despite the high number of borrowers that were forced to renegotiate.
"Tighter covenants provide an early warning that allows investors to review the credit if the risk changes," he said.
Other bankers were not so sure. David Powers, head of loan structuring at Fleet Financial Group in Boston, said the sample of 64 amendments reported between July and December was too small to draw significant conclusions.
"It's a big market out there," he said.
A high-ranking banking regulator who read a synopsis of the report, "Covenant Protection: It's Working," said he was glad that early warning signs of financial distress were being addressed through covenants.
"This is the way risk management should work," the regulator said. "It is an early warning mechanism at the banks, a way to get to deteriorating performance early."
Still, there is concern that lenders are not looking enough for collateral when restructuring loans. An increase in pricing is a good sign, regulators say, but it lacks the security of collateral.
Mr. Rushmore agreed that collateral was important, but added that a majority of the amendments studied were secured in some way, a fact left out of the report.
"Whenever the deal is repriced and restructured to meet the new environment, the banks will always look to take collateral," he said. "If it wasn't secured, but it needs to be, it will be."
There is, however, mounting evidence that disappointing third- and fourth-quarter results are taking their toll on borrowers. Hardest hit are real estate and health-care companies, bankers say.
For instance, American Residential Services Inc., a home-building products service company in Houston, said last week that it expected to post a fourth-quarter loss and that it had entered into negotiations with its bank group, led by BankAmerica, to renegotiate its $165 million syndicated credit line.
"There's been some earnings disappointments out there forcing the implementation of amendments," said Elie Radinsky, a health-care loan analyst with Standard & Poor's in New York. "I see the trend continuing."
Finally, regulators remain worried that lending standards are deteriorating. The growth in loans remains at about three times the U.S. economic growth rate. Too often, regulators say, in that environment "people compete with terms" and price.
"I would like to believe there might to be some tightening up," the regulator said. "On the other hand, there's nothing to tell me underwriting terms and conditions are better."