Credit risk for large, syndicated loans remains high despite some improvement, joint agency report states

Credit risk for large, syndicated loans remains high but did improve “modestly” last year, according to a joint report issued by the federal banking regulators Monday.

In their 2021 Shared National Credit (SNC) Review Report, the three agencies said the elevated credit risk “is largely attributed to the effects of COVID-19” and that the modest improvement is due to a recovery in commodity prices that “has led to significant improvement in the loans to the oil and gas sector,” the agencies said.

That recovery, however, is partially offset by year-over-year weakening in commercial real estate (CRE), particularly in the hotel, office, and retail sub-sectors, the report noted.

The annual SNC looks at the quality of large, syndicated loans based on examination of the loans originated on or before June 30, 2021. The agencies said the 2021 SNC Review, like the 2020 review, focused on borrowers in five industries that were affected significantly by the pandemic: entertainment and recreation, oil and gas, CRE, retail, and transportation services.

The agencies said the 2021 report included reviews of 5,764 borrowers, totaling $5.2 trillion in commitments, up 2.1% from the previous year. The percentage of non-pass loans, including special mention and classified SNC commitments, decreased from 12.4% to 10.6% year over year, the agencies said.

Nearly half of total SNC commitments are leveraged loans, and commitments to borrowers in COVID-19 affected industries represent about one-fifth of total SNC commitments, according to the report. “For leveraged borrowers that also operate in COVID-19 affected industries, non-pass loans decreased slightly to 25.7%, but remain well above the 13.5% observed in 2019,” the report states.

While U.S. banks hold nearly 45% of all SNC commitments, they hold only 25% of non-pass loans, the agencies noted.

Agencies issue 2021 Shared National Credit review