Fed/FDIC/OCC/OTS Joint Re****t of Oct 8, 2008
Can someone pls explain in layman's terms what this re****t means for =
each of the industries mentioned? Graphics (charts) removed for posting =
here.
Thanks!!=20
Bob=20
* * * * * * * *=20
For Immediate Release=20
October 8, 2008=20
Shared National Credits Program1 Re****ts Large Increase in Credit Volume =
and Significant Deterioration in Credit Quality=20
The volume of Shared National Credits (SNC)2, loan commitments of $20 =
million or more and held by three or more federally supervised =
institutions, rose 22.6 percent to $2.8 trillion, and the volume of =
criticized credits increased to $373.4 billion, or 13.4 percent of the =
SNC ****tfolio, according to the 2008 SNC review results released today =
by federal bank and thrift regulators. The results of the =
review--re****ted by the Board of Governors of the Federal Reserve =
System, the Office of the Comptroller of the Currency, the Federal =
Deposit Insurance Cor****ation, and the Office of Thrift Supervision--are =
based on analyses prepared in the second quarter of 2008 of credit data =
provided by federally supervised institutions as of December 31, 2007.=20
The record growth in credit volume is concentrated in large syndicated =
loans that were underwritten in late 2006 and the first half of 2007 led =
by the Media and Telecom, Utilities, Finance and Insurance, and Oil and =
Gas industry sectors. The SNC ****tfolio experienced nominal growth in =
the last half of 2007.=20
Criticized credits3 increased $259.3 billion and represent 13.4 percent =
of the SNC ****tfolio compared with 5.0 percent in the 2007 SNC review. =
Credits rated special mention (potentially weak credits) increased by =
$167.9 billion and represent 7.5 percent of the SNC ****tfolio compared =
with 1.9 percent in the 2007 SNC review. Classified credits (credits =
with well-defined weaknesses) increased $91.5 billion and represent 5.8 =
percent of the SNC ****tfolio compared with 3.1 percent in the 2007 SNC =
review. The criticized credits and related ratios do not include the =
effects of hedging or other techniques that organizations often use to =
mitigate risk.=20
Classified credits held by United States (U.S.) domiciled banking =
organizations increased to $47.2 billion from $19.2 billion, and the =
classified ratio increased to 4.1 percent from 2.0 percent, still low =
compared to the entire ****tfolio. Classified credits held by foreign =
banking organizations increased to $45.9 billion, and the classified =
ratio increased to 4.2 percent from 1.9 percent. Classified credits held =
by non-bank entities increased to $70.0 billion from $34.8 billion and =
represent 42.9 percent of classified credits. The volume of classified =
credits held by non-banks is particularly significant given their =
relatively small 19.9 percent share of the SNC ****tfolio.=20
For the second consecutive year, the review included an *****sment of =
underwriting standards. Examiners again found an inordinate volume of =
syndicated loans with structurally weak underwriting characteristics =
particularly in non-investment grade or leveraged transactions.=20
Table 1: SNC Commitments ($ billions)=20
Year dates represent the official SNC review period. Credit data is =
collected as of December 31 and updated through the end of the annual =
review.=20
Overview=20
The 2008 SNC review included 8,746 credits totaling $2.8 trillion =
extended to 5,742 borrowers. Credit commitments increased by a record =
$514 billion, or 22.6 percent, following $401 billion growth, or 21.4 =
percent, in the 2007 SNC Review. This represents the largest percentage =
growth since 1998 and reflects the merger and acquisition financing boom =
that continued through the first half of 2007. Total outstandings, or =
drawn amounts, of $1.2 trillion were up $373 billion, or 44.6 percent, =
and represent 43.3 percent of commitments compared with 36.7 percent in =
2007.=20
Criticized credits rose to $373.4 billion and represent 13.4 percent of =
the SNC ****tfolio compared with only 5.0 percent in the 2007 SNC review. =
Special mention credits increased to $210.4 billion from $42.5 billion =
in 2007 and represent 7.5 percent of the SNC ****tfolio compared with =
only 1.9 percent in 2007. Special mention credits also constitute a much =
higher percentage of total criticized credits this year at 56.4 percent =
compared with 37.3 percent in 2007. A large number of special mention =
credits sup****t highly leveraged merger and acquisition transactions =
originated in 2006 and 2007 that are characterized by weak underwriting =
standards.=20
Classified credits rose to $163.1 billion from $71.6 billion and =
represent 5.8 percent of the SNC ****tfolio compared with 3.1 percent in =
2007. Credits classified substandard rose to $154.9 billion from the =
2007 review. The severity of the classifications increased this year =
with doubtful and loss credits totaling $8.1 billion compared with $2.0 =
billion in 2007. Nonaccrual4 classified credits increased to $22.3 =
billion from $3.9 billion, but represent a relatively low 0.80 percent =
of the total ****tfolio.=20
Chart 1: Special Mention and Classified Credits=20
Industry Trends=20
The agencies are introducing an industry presentation format that =
aggregates industries vertically along product origination and =
distribution lines. The industry format places credits in seven primary =
groups, largely following the outline of the 2007 Census NAICS codes =
(See Appendix B). The seven primary groups are further dissected into =
twenty-four sectors constructed from ninety-three sub-sectors. An =
industry mapping file is included as an attachment to the press release. =
Services is the largest group at $788 billion, or 28.3 percent of the =
total ****tfolio, and increased by 33.7 percent from 2007. Commodities is =
the second largest group at $597 billion, or 21.4 percent of the total =
****tfolio, and increased 35.9 percent. Financial is the third largest =
group at $545 billion, or 19.6 percent of the total ****tfolio. Within =
the industry groups, sectors with the largest growth are Media and =
Telecom at $78 billion, or 36.4 percent, Utilities at $63 billion, or =
38.3 percent, Finance and Insurance at $62 billion, or 13.2 percent, and =
Oil and Gas at $50 billion, or 36.2 percent. Eighteen of the twenty-four =
sectors experienced double digit growth rates.=20
Criticized credits are concentrated in Services, $151.4 billion or 40.6 =
percent of total criticized credits, Commodities, $69.5 billion or 18.6 =
percent, and Manufacturers, $53.4 billion or 14.3 percent. Special =
mention credits constitute 70.4 percent and 78.0 percent of the =
criticized credits in the Services and Commodities groups, respectively, =
but only 24.7 percent of the Manufacturers group. The highest criticized =
industry groups by percentage are Services, 19.2 percent; Real Estate, =
15.6 percent; and Manufacturers, 13.4 percent. Within the industry =
groups, the highest criticized sectors by percentage are Automotive, =
41.5 percent; Commercial Services, 40.8 percent; Trans****tation =
Services, 24.3 percent; and Media and Telecom, 24.0 percent.=20
Classified credits are concentrated in Services, $44.8 billion, =
Manufacturers, $40.2 billion, Financial, $29.9 billion, and Real Estate, =
$25.3 billion. Real Estate is the highest classified group at 11.4 =
percent followed by Manufacturers at 10.1 percent. Within the industry =
groups, highly classified sectors include Automotive, 34.7 percent, Food =
and Drug Stores, 14.0 percent, Trans****tation Services, 12.4 percent, =
and Real Estate and Construction, 11.4 percent.=20
Special mention credits are concentrated in the Media and Telecom =
sector, $47.1 billion or 22.4 percent of special mention; Materials and =
Commodities Excluding Energy, $27.9 billion or 13.3 percent; Commercial =
Services, $23.8 billion or 11.3 percent; and Utilities, $23.6 billion or =
11.2 percent.=20
Trends by Entity Type=20
The ****tion of SNC credit commitments held by U.S. domiciled banking =
organizations declined slightly to 41.1 percent from 42.7 percent, the =
fourth consecutive year of decline. Holdings by foreign banking =
organizations declined as well to 39 percent from 41.4 percent. Holdings =
by non-bank organizations, such as securitization pools, hedge funds, =
insurance companies, and pension funds, increased to 19.9 percent from =
15.9 percent.=20
Non-bank organizations hold the largest volume and percentage of =
classified credits at $70 billion, or 42.9 percent of total classified =
credits compared with 48.6 percent in 2007. In addition, 12.6 percent of =
non-bank organization credits are classified compared with only 4.1 =
percent of the U.S. bank ****tfolio and 4.2 percent of the foreign bank =
****tfolio.=20
Although non-bank organizations continue to hold the largest dollar =
volume and percentage of classified credits, the growth in classified =
credits over the past year was evenly distributed. Classified credits =
held by U.S. banks increased $28.0 billion, or 145.8 percent, with =
foreign banks classified credits increasing $28.3 billion and non-banks =
classified credits increasing $35.2 billion, or 101.2 percent.=20
SNC Underwriting=20
The SNC Review included an evaluation of underwriting standards on =
approximately one thousand credits booked, or funded, in 2007. Areas =
evaluated included structure, repayment terms, pricing, collateral, loan =
agreements, and financial analysis and monitoring techniques. Examiners =
continued to identify an inordinate volume of syndicated loans with =
structurally weak underwriting characteristics, particularly for credits =
sup****ting M&A transactions of highly leveraged companies. Nearly all =
these credits were underwritten prior to the disruptions in the credit =
market in mid 2007.=20
The most commonly cited types of structurally weak underwriting were =
liberal repayment terms, repayment dependent on refinancing or =
recapitalization, and nonexistent or weak loan covenants. Examiners also =
found that an excessive number of loan agreements did not provide =
adequate warnings and allow for proactive control over the credit.=20
The impact of the volume of syndicated loans with structurally weak =
underwriting characteristics is evidenced by the rise in criticized =
credits this year. In fact, 56 percent of the 2007 vintage credits =
included in this year's underwriting review were criticized special =
mention or substandard compared with 21 percent last year. In addition, =
most of the 2006 vintage credits that were analyzed during the 2007 SNC =
review remain outstanding, and the criticized percentage of those =
credits has increased to 33 percent.=20
The agencies have longstanding guidance, particularly through their =
April 2001 interagency guidance on Leveraged Financing, Sound Risk =
Management Practices, stressing the im****tance of prudential =
underwriting for leveraged financial transactions. However, examiners =
have found that underwriting practices are more likely to be compromised =
when syndicated loans are underwritten for resale versus more prudential =
underwriting standards used for loans held for investment. Consequently, =
banks that originate syndicated loans for distribution should have risk =
management systems in place to ensure underwriting standards are =
reasonably consistent with underwriting standards used if holding the =
loan for investment. More specifically, banks should ensure underwriting =
practices include a comprehensive and realistic *****sment of a =
borrower's capacity to repay or de-lever over a reasonable period of =
time. SNCs with structurally weak underwriting characteristics and =
borrower financial performance and projections that do not sup****t the =
prospects of reasonable repayment will be subject to regulatory =
criticism by the agencies.=20
In addition, syndicated pipeline commitments are expected to be =
periodically evaluated to determine if creditworthiness, pricing, and =
covenant structures provide reasonable protection in the event of a =
change in market credit risk appetite. Credit commitments that do not =
fit an institution's hold for investment criteria should be subjected to =
concentration limits and stress testing processes that evaluate a =
borrower's ability to perform under different economic scenarios.=20
FDIC: PR-96-2008=20
Industry Definition Outline (PDF Help)=20
Media Contacts:=20
FRB:=20
Deborah Lagomarsino=20
(202) 452-2955=20
OCC:=20
Kevin Mukri=20
(202) 874-5770=20
FDIC:=20
David Barr=20
(202) 898-6992=20
OTS:=20
William Ruberry=20
(202) 906-6677=20
1 The Shared National Credit (SNC) Program was established in 1977 by =
the Board of Governors of the Federal Reserve System, the Federal =
Deposit Insurance Cor****ation, and the Office of the Comptroller of the =
Currency. In 2001, the Office of Thrift Supervision became an assisting =
agency. The annual program seeks to provide an efficient and consistent =
review and classification of shared national credits.=20
2 A SNC is any loan and/or formal loan commitment, and any asset such as =
other real estate, stocks, notes, bonds and debentures taken as debts =
previously contracted, extended to borrowers by a supervised =
institution, its subsidiaries and affiliates. Further, a SNC must have =
an original amount that aggregates $20 million or more and either 1) is =
shared by three or more unaffiliated supervised institutions under a =
formal lending agreement or 2) a ****tion is sold to two or more =
unaffiliated supervised institutions with the purchasing institutions =
assuming their pro rata share of the credit risk.=20
Credits include syndicated loans and loan commitments, letters of =
credit, commercial leases, as well as other forms of credit. Credit =
commitments include both drawn and undrawn ****tions of credit =
facilities. This release re****ts only the par amounts of commitments; =
these may differ from the amounts at which loans are carried by =
investors.=20
A supervised institution is one which is subject to supervision by one =
of the federal bank regulatory agencies, including all FDIC-insured =
banks, their branches, subsidiaries, and affiliates; bank holding =
companies and their non-bank subsidiaries and affiliates; and federal =
and state-licensed branches and agencies of foreign banks.=20
3 Criticized credits are the total of credits classified substandard, =
doubtful, and loss - and credits rated special mention. Classified =
credits are only those rated substandard, doubtful, and loss. Under the =
agencies' Uniform Loan Classification Standards, classified credits have =
well-defined weaknesses, including default in some cases. Special =
mention credits exhibit potential weaknesses, which may result in =
further deterioration if left uncorrected.=20
Excerpt from federal banking agencies' examination manuals defining =
regulatory classifications: A Substandard asset is inadequately =
protected by the current sound worth and paying capacity of the obligor =
or of the collateral pledged, if any. Assets so classified must have a =
well-defined weakness or weaknesses that jeopardize the liquidation of =
the debt. They are characterized by the distinct possibility that the =
institution will sustain some loss if the deficiencies are not =
corrected. An asset classified Doubtful has all the weaknesses inherent =
in one classified Substandard, with the added characteristic that the =
weaknesses make collection or liquidation in full, on the basis of =
currently existing facts, conditions, and values, highly questionable =
and improbable. Assets classified Loss are considered uncollectible and =
of such little value that their continuance as bankable assets is not =
warranted. This classification does not mean that the asset has =
absolutely no recovery or salvage value but rather that it is not =
practical or desirable to defer writing off this basically worthless =
asset even though partial recovery may be affected in the future. =
Amounts classified Loss should be promptly charged off.=20
Excerpt from the June 10, 1993 Interagency Statement on the Supervisory =
Definition of Special Mention Assets: A Special Mention asset has =
potential weaknesses that deserve management's close attention. If left =
uncorrected, these potential weaknesses may result in deterioration of =
the repayment prospects for the asset or in the institution's credit =
position at some future date. Special Mention assets are not adversely =
classified and do not expose an institution to sufficient risk to =
warrant adverse classification.=20
4 Nonaccrual loans are defined for regulatory re****ting purposes as =
"loans and lease financing receivables that are required to be re****ted =
on a nonaccrual basis because (a) they are maintained on a cash basis =
due to a deterioration in the financial position of the borrower, (b) =
payment in full of interest or principal is not expected, or (c) =
principal or interest has been in default for 90 days or longer, unless =
the obligation is both well secured and in the process of collection."=20
Appendix A: Committed and Outstanding Balances (Dollars in Billions)=20
Appendix B: Summary of Shared National Credit Industry Trends (Dollars =
in Billions)=20
Appendix C: Exposures by Entity Type=20
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