Report: Credit risk on the rise in wake of pandemic, with nearly half of $5.1 trillion in commitments leveraged loans

Credit risk for large, syndicated loans has increased over the last year, according to a report issued Thursday by the federal banking agencies, largely as a result of the financial impact of the coronavirus pandemic.

According to the 2020 Shared National Credit (SNC) Review issued by the Federal Reserve, Federal Deposit Insurance Corp. (FDIC), and Office of the Comptroller of the Currency (OCC) – which evaluates the quality of large, syndicated loans – nearly half of the 2020 commitments of $5.1 trillion were leveraged loans (that is, loans to borrowers that already have high amounts of debt or poor credit history).

The report notes that the SNC portfolio included 5,652 borrowers in 2020, whose total commitments were up 5% from 2019. The review results provide, the agencies said, additional analysis focusing on borrowers in five industries that were affected significantly by the pandemic: entertainment and recreation, oil and gas, real estate, retail, and transportation services.

“The percentage of ‘non-pass’ loans, including special mention and classified SNC commitments, for the portfolio rose to 12.4% from 6.9% year over year,” according to a release issued by the agencies about the report. A non-pass loan is considered any loan that is rated special mention, substandard, doubtful, or a loss.

The release stated that while U.S banks held nearly 45% of all SNC commitments, they held less than a quarter of non-pass loans. For leveraged borrowers operating in COVID-19-affected industries, the release stated, non-pass loans rose to 29.2% from 13.5% year over year. Commitments to borrowers in COVID-19-affected industries represented about one-fifth of all SNC commitments, the release stated.

The agencies said that, in response to loan risks, banks had “substantially increased” loan-loss reserves. Aggregate capital in the system, the agencies said, rose by nearly one percentage point since March 2020. “Supervisors will monitor the performance of this portfolio relative to the increased loss cushion established by banks during 2020,” the agencies stated.

Joint Release/Agencies Issue Shared National Credit Review