The Office of the Comptroller of Currency, the Federal Reserve and
the Federal Deposit Insurance Corp, in an annual process called the
Shared National Credit (SNC) review, examined bank portfolios for
compliance with guidelines on leveraged loans that limit how much
debt a company can take on.
Contrary to some bankers' expectations that excessive violations
would be discovered, the SNC review's findings are comparable to
last year's, according to banking sources. The sources didn't
provide details on the review's findings.
"Our banking members have said that the SNC review has gone mostly
as expected, and is mostly in line with last year," said Meredith
Coffey, executive vice president of the trade group Loan
Syndications & Trading Association.
That suggests a benign outcome for the industry, were it to be
confirmed by regulators. It could provide banks with a measure of
relief at a time when many of their historically profitable
businesses are under pressure.
Making junk-rated loans to companies is a lucrative, high-margin
business for major Wall Street banks. Last year leveraged loans
generated $1.47 billion in fees in the United States alone. The top
five issuers of such loans so far this year have been JPMorgan Chase
& Co, Bank of America Corp, Wells Fargo & Co, Credit Suisse Group AG
and Deutsche Bank AG..
The last SNC review was published in September 2013 and covered $800
billion of $3 trillion in credit commitments, with a focus on
leveraged loans. Regulators also expressed dissatisfaction with the
results of that review.
The 2013 SNC review found that "criticized" assets, which are
considered by regulators to be problematic, represented 10 percent
of the SNC portfolio, down from 11 percent in 2012 but twice the
percentage of pre-financial crisis levels.
Credits rated "special mention" -- a catch-all category for loans
that may seem fine now but regulators suspect may exhibit weakness
in the future -- increased from $99 billion to $115 billion,
representing about 4 percent of the portfolio.
It could not be learned, however, whether regulators planned to take
any action against individual banks as a result of this year's
review, the results of which are due to be published in the autumn.
Spokespeople for the OCC, the Fed and the FDIC declined to comment.
Bank of America, Credit Suisse and Wells Fargo declined to comment,
while JPMorgan and Deutsche Bank did not respond to requests for
[to top of second column]
Leveraged loan issuance has kept a robust pace as investors chase
yield amid the Fedís cheap money policy. Issuers such as private
equity portfolio companies have used that demand to issue junk-rated
loans and pay themselves dividends or do more acquisitions.
U.S. leveraged loan issuance reached $527 billion in the first half
of 2014. Last year, it reached a record $1.14 trillion, up 72
percent from the year before, according to Thomson Reuters Loan
The regulatory guidelines do not set an absolute limit on leverage,
and instead say that loans that would increase the borrower's debt
levels to more than 6 times its cash flow raise "concerns for most
industries". The percentage of leveraged buyouts with leverage over
six times has risen to 55 percent so far this year from zero in
2009. It is now flirting with the 57 percent all-time high seen in
2007, prior to the financial crisis.
In the previous SNC review, published in September 2013, regulators
had expressed dissatisfaction with the results. The Fed and the OCC
have also sent private letters to banks last year expressing
concerns about it, sources have previously said. In recent comments,
Fed Chair Janet Yellen also said lower-rated corporate debt was an
area where "valuations appear stretched".
Some bankers said they feared regulators may still crack down on
them, using criteria in the guidelines that are more subjective,
such as the fuzziness around the leverage threshold.
They said regulators have been strict about some elements of their
guidance, which has boosted compliance. For example, there is no
flexibility in the underwriting requirement that the borrower should
be able to fully repay senior secured debt - or at least half of its
total debt - over five to seven years.
(Additional reporting by Lauren Tara LaCapra and Soyoung Kim in New
York; Editing by Paritosh Bansal and John Pickering)
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