The Surprising 2018 SNC Review Results: Risk in the Portfolio of Syndicated Bank Loans Has Declined

Kramer Levin Naftalis & Frankel LLP

On Jan. 25, 2019, the board of governors of the Federal Reserve System (the Federal Reserve), the Federal Deposit Insurance Corporation (the FDIC) and the Office of the Comptroller of the Currency (the OCC, and together with the Federal Reserve and the FDIC, the regulators) released the results of the first- and third-quarter 2018 Shared National Credit (SNC) Program Reviews, the process by which the regulators assess credit risk and trends and risk management practices with respect to the largest and most complex credits shared by multiple regulated banks.

SNC reviews began in 1977 and review credits with a minimum amount of $100 million shared by two or more regulated banks. They are completed in the first and third quarters of the calendar year. Large agent banks receive two reviews each year, while most other agent banks receive a single review each year.

The highlights of the 2018 SNC Program Review include findings by the regulators that the level of loans in the SNC portfolio with the lowest supervisory ratings (special mention and classified) declined 29.4 percent, largely because of improving economic conditions in the oil and gas sectors. However, the regulators noted that many leveraged loan transactions possess weakened transaction structures and increased reliance upon revenue growth or anticipated cost savings and synergies to support borrower repayment capacity. The regulators also noted that nonbank entities have increased their participation in the leveraged lending market via both purchases of loans and/or direct underwriting and syndication of exposure, and that more leveraged lending risk is being transferred to these nonbank entities, which hold 62 percent of all special mention and classified loans and commitments.

The press release issued by the regulators relating to the 2018 SNC Program Review can be found here. The full report can be found here.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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