WASHINGTON — The quality of large syndicated loans to corporations has steadily improved since 2009, but the latest review of shared national credits showed a milestone of sorts in the years following the crisis: higher volume.
Oversized corporate loans shared by three or more lenders increased by 11% — to $1.24 trillion — from early last year, the banking agencies reported Monday in their annual Shared National Credits Review.
The report, which tracks loans or other commitments that individually exceed $20 million, also showed institutions continuing to shed bad credits that faltered during the crisis. So-called "criticized" SNC assets declined 8% from the previous year to $295 billion, the third consecutive such decline. However, troubled syndicated loans still remain historically high, and the agencies cited concerns about recent underwriting for highly-leveraged borrowers.
"Although credit quality improved over the past three years, the percentages of criticized and classified assets remain elevated … as weak economic conditions continue to impact businesses," the report said.
Still, observers hailed the increase in loan balances for SNC assets as another sign of improvement in the commercial lending sector.
"It shows that the economy is mending and bankers are more willing to lend and extend credit, especially to midsized and large firms. This is consistent with what we've seen in" overall industry data for commercial and industrial loans, said Keith Leggett, senior economist at the American Bankers Association.
Criticized assets made up 10.6% of total SNC assets, down from 12.7% in the 2011 report. (Criticized assets are any that fall under four different categories of deterioration: special mention, substandard, doubtful and loss.)
All categories except "doubtful" assets showed declines. Loans with a special mention declined 6.7% to $99 billion, with substandard assets down 15% to $161.7 billion and loans reported as "loss" down 53% to $4.6 billion. Doubtful assets more than doubled to $29.5 billion. (The 2012 review was compiled based on data from both March 31 of this year and yearend 2011.)
"Consistent with the results of the 2011 SNC Review, the reduction in the volume of criticized assets this year can be attributed to improved borrower operating performance, debt restructurings, bankruptcy resolutions, and greater borrower access to bond and equity markets," the report said.
But regulators expressed concern about a particular subset of SNC assets known as "leveraged finance," where credit is given to businesses with a higher amount of leverage relative to their cash flows compared to industry norms. The agencies, which are currently drafting guidance intended for lenders to improve underwriting of highly leveraged borrowers, suggested lenders may be extending overly flexible repayment terms for leveraged loans.
"The criticized rate" for leveraged loans "remained consistent with last year's 51.0% which is substantially above the overall portfolio criticized rate of 10.6%," the report said. "While leverage within this portfolio has moderately declined, 75% of transaction structures were cited as weak due to few financial covenants, excessive covenant headroom and minimal amortization requirements."
The agencies added that although underwriting standards for syndicated loans overall have improved since the crisis, they see standards being loosened somewhat in certain areas, including leveraged loans. The review said the number of SNCs that were originated in all of 2011 increased by 61% compared to the previous year, and amounted to roughly 114% of the credits originated in 2007.
"The primary underwriting deficiencies identified during the 2012 SNC Review were minimal or no loan covenants, liberal repayment terms, repayment dependent on refinancing, and inadequate collateral valuations," the report said. "The easing in standards may be due to aggressive competition and market liquidity, and was more pronounced in leveraged finance transactions."
Leggett said regulators start to worry when they see borrowers with "less skin in the game."
"Compared to other types of syndicated loans, this one still has higher incidence of being criticized," he said.
The types of financial institutions most involved in shared credits changed little from the previous report. U.S banking organizations owned about 43% of total SNC commitments, compared to nearly 37% for foreign bank organizations and 20% for nonbanks.
The media and telecommunications industry led other sectors in the dollar amount of criticized credits with $66 billion, followed by finance and insurance ($34 billion) and utilities ($30 billion). Yet the entertainment industry had the highest rate of their borrowings criticized at 28.3%, followed by the media (24.6%) and transportation (22.7%).