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By John Goff
Could this be the next big trouble
spot for lenders?
According to the 2009 government-sponsored review of Shared National Credits
(SNCs), credit quality for large syndicated loans has plummeted this year. Indeed, the annual review of
nearly 9000 shared credits -- representing nearly $3 trillion extended to
approximately 5,900 borrowers -- showed that a fair number of lenders may not
be getting their money back.
‘Criticized assets’ (the SNC’s catch-all term for
potentially shaky loans) skyrocketed to $642 billion. That’s a huge increase
from the $373 billion in criticized assets the year before.
In fact, those worrisome loans now comprise nearly a quarter of all the
syndicated loans the SNC tracks. Last year, criticized assets represented just 13.4
percent of the total SNC portfolio.
The survey, which monitors loan commitments of $20 million or more held by
multiple federally supervised institutions, is a joint effort of the Federal
Reserve, Federal Deposit Insurance Corp, Office of the Comptroller of the
Currency, and the Office of Thrift Supervision.
The credit risk of these large loan commitments is shared among U.S. banks,
foreign banks, and nonbanks. Typically, nonbanks include securitization pools,
hedge funds, insurance companies, and pension funds.
As you might expect, the SNC found that nonbanks are facing the biggest
problems with their syndicated loans.
The numbers tell the tale. While non-bank syndicated loans comprised barely
one-fifth of the facilities the SNC tracks, those loans accounted for nearly
half of the most worrisome loans in the portfolio (what the SNC dubbs
‘classified assets’). Conversely, syndicated loans by U.S. banks made up
roughly 40 percent of the loan portfolio tracked by the SNC -- but only 30
percent of the classified assets.
The data for the survey was taken from the second quarter of the year. Loans
were reviewed and categorized by the severity of their risk -- special mention,
substandard, doubtful, or loss -- in order of increasing severity. The lowest
risk loans (special mention) had potential weaknesses that deserve management
attention to prevent further deterioration. The most severe category of loans (loss)
includes loans that were considered uncollectible.
There are plenty of those out there, apparently. The volume of loans in the SNC
portfolio classified as loss -- that is, “considered to be uncollectible and of
so little value that their continuance as bankable assets is not warranted” -- topped
$53 billion. For some perspective on that staggering total, consider this: the
$53 billion exceeded the
combined loss for the previous eight SNC reviews. It also nearly tripled the
previous single-year high in 2002.
Likewise, the shared national credits classified as doubtful or loss rose to
$110 billion. In $2008, that number was closer to $8 billion.
Shocking stuff. What’s more, syndicated loans in nonaccrual status increased
nearly eight times to $172 billion, up from $22 billion last year.
Not surprisingly, three sectors accounted for a whole lot of these risky loans.
Media and telecom topped the list, with $112 billion in criticized assets.
Finance and insurance was next, followed by real estate and construction. All
told, these three troubled industries were responsible for fully 40 percent of
the criticized credits in the SNC basket.
The review also uncovered “significant deterioration” in credit quality of
leveraged finance credits. About 72 percent -- 72 percent, mind you -- of the
dollar volume of the 50 largest leveraged finance loans tracked by the SNC were
classified as ‘criticized assets.’
That’s not good. In explaining the
dramatic deterioration in the overall credit quality of syndicated loans, the
SNC rounded up the usual suspects. “The declining credit quality is attributed
to weak economic conditions affecting most industries,” the report stated “and
weak credit underwriting standards leading up to 2008.”
That part we knew.
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