Declining credit quality trends due to the pressure of higher interest rates on leveraged borrowers and compressed operating margins in some industry sectors are becoming clearer, a report from federal bank agencies indicated Friday.
According the 2023 Shared National Credit (SNC), issued by the Federal Reserve, Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corp. (FDIC), credit quality associated with large, syndicated bank loans remains moderate.
However, the agencies said, risks in leveraged loans remain high, and risks in certain industries, including technology, telecom and media, health care and pharmaceuticals, and transportation services are also elevated.
“Risk in the real estate and construction sector is segmented, with deteriorating trends in some sub-sectors being offset by stability and/or improvement in other sub-sectors,” the report states.
But, there are some good signs, according to the report. It stated that industries affected by the pandemic, including transportation services and entertainment/recreation, continue to show notable improvement.
The agencies said the 2023 review reflects the examination of SNC loans originated on or before June 30, 2023. The review focused on leveraged loans and stressed borrowers from various industry sectors. The report’s portfolio included 6,589 borrowers, totaling $6.4 trillion in commitments, an increase of 8.7% from a year ago, the agencies said.
The report also notes that loans deserving special attention are increasing. According to the SNC, the percentage of loans that deserve management’s close attention (“non-pass” loans comprised of SNC commitments rated “special mention” and “classified”) increased from 7% of total commitments to 8.9% year over year.
“While U.S. banks hold 46% of all SNC commitments, they hold only 20% of non-pass loans. Nearly half of total SNC commitments are leveraged, and leveraged loans comprise 86% of non-pass loans,” the report states.