Leveraged loans and credits in the oil-and-gas sector led regulators to caution that risk in the shared national credits portfolio remains "high," they said in a press release.
The Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the Federal Reserve released their review of the shared national credits program Aug. 2. Reviews of the credits are performed semiannually and released to the public once a year. The latest public release covers reviews from the third quarter of 2016 and the first quarter of 2017.
The regulators noted that risk has reduced, and the amount of credits not receiving a "pass" rating has reduced to 9.7% of the total nationwide portfolio from 10.3%. Still, the regulators said risk in these credits remains elevated, pointing to leveraged loans and oil-and-gas industry borrowings.
Leveraged loans were 64.9% of all non-pass-rated credits, also called adversely risk rated credits, which are tabbed as "special mention" or three levels of "classified" — "substandard," "doubtful" and "loss." Oil-and-gas loans were 25.7% of non-pass-rated credits, and the majority of these commitments were held by banks as opposed to nonbanks.
The 2017 portfolio included 11,350 credit facilities to 6,902 borrowers, totaling $4.3 trillion, which was up from 2016's $4.1 trillion. Oil-and-gas borrowings made up 10.9% of the entire portfolio.
Also, $317 billion in leveraged-loan credits were categorized with the lowest "pass" rating, which raised additional concerns among the regulators should the economy take a turn for the worse. They cautioned against using aggressive projections in attempts to justify "pass" ratings, and they observed underwriting weaknesses in this area, though underwriting and risk management improved overall.
"Examiners noted several common weaknesses in underwriting, including ineffective covenants, liberal repayment terms, and incremental debt provisions that allow for increased debt, which may inhibit deleveraging capacity and dilute senior secured creditors," they noted regarding leveraged-loan credits.