Distressed borrowers in oil and gas industry account for high credit risk, federal financial report shows

Risk in the portfolio of large syndicated bank loans fell slightly but remains elevated, according to the Shared National Credit Program Review. On Wednesday (Aug. 2), the Federal Reserve Board, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency released the review.

The high level of credit risk “stems primarily from distressed borrowers in the oil and gas sector and other industry sector borrowers exhibiting excessive leverage,” according to the joint news release. The review also shows that credit risk management practices at most large agent banks have continued to improve and are consistent with the 2013 Interagency Guidance on Leveraged Lending.

Those included in the review include 11,350 credit facilities to 6,902 borrowers, representing a total of $4.3 trillion, up from $4.1 trillion in 2016. U.S. banks had the most commitments at 45.3% of the portfolio, followed by foreign banking organizations and non-bank entities. The review was based on exam results that took place in the third quarter of 2016 and the first quarter of 2017.

“Loans were reviewed and stratified by the severity of their risk — special mention, substandard, doubtful or loss — in order of increasing severity,” the release shows. “Classified commitments include commitments rated substandard, doubtful and loss.”

The following are some of the other highlights in the review:

• Non-pass commitments fell to 9.7% this year, from 10.3% in 2016. Commitments rated special mention and classified decreased to $417.6 billion, from $421.4 billion.
• Leveraged lending was the top contributor to the special mention and classified rate. Leveraged loans accounted for 64.9% of all special mention and classified commitments. Oil and gas loans comprised of 25.7% of all special mention and classified commitments.

Click here for the report.