A joint report by the Federal Reserve, FDIC, and Office of Comptroller of the Currency shows that little has changed among lending practices since the March 2013 leveraged lending guidance was released. The report found that the volume of loans that are rated with negative implications by rating agencies – referred by the agencies as a criticized asset – remained unchanged in 2014 from the prior year, at roughly $341 billion, or 10% of total loan commitments.
Leverage loans, as reported by agent banks, make up roughly 23%, or $767 billion, of the annual Shared National Credits (SNC) review – a review that was established in 1977 to review any formal loan, commitment, and asset such as stock, notes, and bonds extended to borrowers by a federally supervised institution and includes commitments that FBOs and nonbanks such as securitization pools, hedge funds, and insurance companies participate in. In the SNC review, leverage loans accounted for roughly $255 billion, or 75% of “criticized” SNC assets. The report also notes that roughly a third of leverage loans were criticized.
A full report of the shared national credits program 2014 review and the leverage loan supplement are attached, downloadable here: Shared National Credits Program 2014 Review & Leveraged Loan Supplement.
The report also included a leveraged loan supplement that identifies several areas where institutions need to strengthen compliance the March 2013 guidance, including provisions addressing borrower repayment capacity, leverage, underwriting, and enterprise valuation [attach PDF]. In addition, examiners noted risk-management weaknesses at several institutions engaged in leveraged lending including lack of adequate support for enterprise valuations and reliance on dated valuations, weaknesses in credit analysis, and overreliance on sponsor’s projections.
The LSTA released a statement this afternoon stating that leverage lending is a critical for the U.S. economy and encouraged agencies to continue evaluating leveraged loans on a “nuanced basis, balancing the importance of a safe system, while ensuring that credit-worthy companies are still able to access the financing they need. – Richard Kellerhals