A rating agency executive has added his voice to the mounting warnings of risk in syndicated lending.
"Covenants and structures have weakened, there's no doubt about it,"Randy Szuch, a director in the loan products group at Fitch Investors Service, said at a syndicated loan and high-yield debt conference sponsored by American Banker/Strategic Research Institute.
"We're seeing higher leverage multiples and weaker operating statistics," Mr. Szuch added, saying the liquidity in the market has dampened the number of potential defaults that otherwise may have emerged.
With the loan market booming, regulators, lenders, and investors have expressed concern that participants are cutting corners and ignoring risks.
"These deals are going to market faster, and investors are making a decision with less information," Mr. Szuch said. "This is not to say that the deals aren't good, but it's difficult to make a well-informed decision in 48 hours.
"You used to have three weeks to make a decision - and even that was flexible - but with the growth of the syndicated market, it's just not happening," he said.
Mr. Szuch said he anticipates "one celebrated failure" that will "pull everyone in" and cause investors and underwriters to take a step back. Although individual instances of default have recently popped up, "it's not enough," Mr. Szuch said.
Although agencies currently rate a relatively small portion of syndicated loans, their role could expand along with that market.
The agencies assess loans based on collateral valuation, simulated default scenarios, priorities claims, loss severity, and expected loss percentage.
The expected loss calculation is similar to what is used in the asset- backed world.
Banks' views on the need for ratings depends in part on their own strategies in the market.
"Banks can play different roles, and their eagerness to obtain bank loan ratings that would expand the investor pool and push pricing down is going to be different as they view themselves as agents for the borrowers and as investors in bank loans," said Steve Bavaria, a director of new products at Standard & Poor's.
"This is a major psychological shift, and to the extent that they've made that jump, they're much more willing to use credit ratings and do whatever they can in structuring and selling the deal to expand the potential investor audience and get the customer the best terms," Mr. Bavaria said.
Those who heard Mr. Szuch's warnings agreed there is cause for concern.
George Lula, a syndicated lender at PNC Capital Market, said he sees the decline in underwriting standards, increased leverage, reduced covenants, and reduced pricing spreads that Mr. Szuch discussed.
"That's an alarm that should be heeded at this juncture," Mr. Lula said.