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Syndicated loans the next to blow Print E-mail
Friday, 25 September 2009

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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