Federal banking regulators released their 2023 Shared
National Credit (SNC) report assessing credit quality and risk factors associated
with large, syndicated bank loans as “moderate” despite some downward trends attributed
to high interest rates. The SNC program analyzes industry developments among
the largest and most complex credit facilities shared by regulated financial
institutions and nonbank investors.
The program is governed by an interagency agreement among
the Federal Reserve, the Federal Deposit Insurance Corp. (FDIC) and the Office
of the Comptroller of the Currency (OCC).
The 2023 SNC portfolio included 6,589 borrowers, totaling
$6.4 trillion in commitments – 8.7 percent higher than the previous year. The
overall SNC population increased by $512 billion, or 8.7 percent
year-over-year, with an increase of $438 billion in loans, which banks consider
to be investment-grade loans. During that timeframe, outstanding balances
increased by 7.3 percent alongside a 6 percent increase in borrowers and credit
facilities throughout 2023.
“The volume of leveraged transactions exhibiting layered
risks increased significantly over the past several years, as strong investor
demand for loans enabled borrowers to obtain less restrictive terms,” the
agencies wrote in the report. “To date, the performance of these leveraged
loans has not been tested through a typical economic cycle. The agencies
continue to focus on assessing the impact of layered risks in leveraged lending
transactions and the appropriateness of credit risk management practices in
adapting to the changing environment.”
Risks in leveraged loans remain high, with specific
industries like technology, telecom, media, healthcare, pharmaceuticals and
transportation services facing elevated risks, the report indicates. The real
estate and construction sectors show signs of segmented risk, with some
sub-sectors observing deteriorating trends.
U.S. banks hold 46 percent of all SNC commitments but only
20 percent of non-pass loans, the report stated. Nearly half of all SNC
commitments are leveraged, and leveraged loans account for 86 percent of
non-pass loans.
Nonbank entities continue to participate in the leveraged
lending market to earn returns from holding purchased credit exposure, the agencies
explained in the report. These entities hold a disproportionate share of all
loan commitments rated special mention or classified, compared to U.S. banks
and foreign banking organizations (FBOs).
“These nonbank entities hold a significant portion of
non-pass leveraged commitments and non-investment grade equivalent leveraged
term loans,” the report stated. “By comparison, the SNC leveraged exposure held
at banks is primarily comprised of investment-grade equivalent revolving credit
facilities. However, the agencies note that these investment preferences are
not universal as risk appetite varies among bank and nonbank participants.”
U.S. banks and FBOs held 78.9 percent of the total exposure,
but only 35 percent of the non-pass exposure, the report continued. The special
mention and classified rates at U.S. Banks and FBOs are 3.8 percent and 4.2
percent, respectively, while the special mention and classified rate at
Nonbanks is 27.5 percent.
Despite challenges, industries affected by the pandemic,
such as transportation and entertainment, demonstrate notable improvement,
according to the report.
The agencies also noted positive developments in
other industry segments with “greater vulnerability to rising interest rates
and other macroeconomic factors,” including construction and real estate, as
well as health care and pharmaceuticals; technology, telecom and media; and
transportation services. The report states that these industries “showed high
and/or increasing special mention and classified rates.”