Credit quality drops for loan commitments, Shared National Credits review finds

By Sara Rosenberg

New York, Sept. 24 - Credit quality declined sharply for loan commitments of $20 million or more held by multiple federally supervised institutions, according to the 32nd annual review of Shared National Credits.

The credit risk of these loan commitments was shared among U.S. banks, foreign banks and nonbanks, such as securitization pools, hedge funds, insurance companies and pension funds.

Criticized assets, which included Shared National Credits classified as special mention, substandard, doubtful or loss, reached $642 billion, up from $373 billion last year, and represented 22.3% of the portfolio compared with 13.4% in 2008.

Criticized volume was led by the media and telecom industry group with $112 billion, finance and insurance with $76 billion, and real estate and construction with $72 billion.

The review identified significant deterioration in credit quality of leveraged finance credits, with these loans representing more than 40% of the dollar volume of total criticized assets. About 72% of the dollar volume of the 50 largest leveraged finance Shared National Credits were criticized, which represents one-third of all criticized assets.

Meanwhile, classified assets, which included credits labeled as substandard, doubtful or loss, rose to $447 billion from $163 billion and represented 15.5% of the portfolio, compared with 5.8% last year.

Nonbanks held 47% of classified assets in the Shared National Credits and U.S. banks held 30.2% of the classified assets.

As for special mention assets, which exhibited potential weakness and could result in further deterioration if uncorrected, they declined to $195 billion from $210 billion and represented 6.8% of the portfolio, compared with 7.5% in 2008.

The review also found that underwriting standards in 2008 improved from prior years, with examiners identifying fewer loans with structurally weak underwriting characteristics compared to credits written in 2007 and 2006. However, the Shared National Credits portfolio contained loans with structurally weak underwriting characteristics that were committed before mid-2007 that contributed significantly to the increase in criticized assets.

The 2009 review covered 8,955 credits, totaling $2.9 trillion, extended to about 5,900 borrowers. In conducting the review, agencies looked at $1.2 trillion of the $2.9 trillion credit commitments in the portfolio. The sample was heavily weighted toward non-investment-grade and criticized credits.

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