###  Board of Governors of the Federal Reserve System

### Joint Release Federal Deposit Insurance Corporation

# **Office of the Comptroller of the Currency**

# 

NR 2002-79

For Immediate Release October 8, 2002

Bank Regulatory Agencies Find Adversely Rated Syndicated Loans

Continue to Increase in 2002, but at Slower Rate than Previous Year

WASHINGTON \-- The quality of large syndicated bank loans continued to
deteriorate this year, but at a slower rate than was evident in 2001,
according to the 2002 Shared National Credit (SNC)[^1] review, which
federal bank regulators released today. The deterioration was consistent
with general economic, sectoral, and credit market trends.

The results \-- reported by the Board of Governors of the Federal
Reserve System, the Office of the Comptroller of the Currency and the
Federal Deposit Insurance Corporation \-- are based on analyses that
were prepared during the second quarter and reflect business and
economic conditions that prevailed at that time.

For the 2002 review, total loan commitments classified as either
substandard, doubtful or loss rose by \$39.4 billion or 34 percent over
the previous year, compared to a net increase of \$54.3 billion or 86
percent the year before. At the same time, commitments rated special
mention rose \$3.6 billion or 5 percent compared to \$39.1 billion or
108 percent the year before.

Adversely rated credits are the total of loans classified substandard,
doubtful, and loss and loans rated special mention. Under the agencies'
Uniform Loan Classification Standards, classified loans have well
defined weaknesses, including default in some cases, while special
mention loans exhibit potential weaknesses, which may result in further
deterioration if left uncorrected.

Deterioration since the middle of last year was largely driven by the
pronounced problems in the telecommunication sector, alleged corporate
fraud, weakness from the recent recession, and the after-effects of
September 11th. Similar to last year, deterioration has been
particularly evident for credits to leveraged and speculative-grade
borrowers that are facing difficulty generating sufficient cash flow to
service their debts because of over capacity, weaker pricing or slower
than anticipated growth. At the same time, certain market segments have
shown moderate improvement, with the professional, scientific,
financial, insurance and other service sectors showing lower
classification levels relative to 2001.

In 2002, the SNC Program covered 9,328 credits totaling \$1.9 trillion
in loan commitments to 5,542 borrowers. Of the total commitments, \$692
billion was advanced and outstanding. Classified credits totaled \$157.1
billion, or 8.4 percent of total commitments, up from \$117.6 billion or
5.7 percent in 2001. At the same time, loans listed for special mention
rose to 4.2 percent of total commitments, from 3.7 percent in 2001. On a
combined basis, special mention and classified loans represent 12.6
percent of total commitments, up from 9.4 percent a year ago but still
below the peak of 16 percent in 1991 (see Chart 1 and Appendix A). None
of these figures include the effects of hedging or other techniques that
individual organizations might have employed to mitigate risk.

![](media/image1.wmf){width="4.80625in" height="2.875in"}

Of particular note for 2002 was a record \$19.6 billion in commitments
characterized as loss, up \$11.6 billion from the year before. Of that
total, \$7.6 billion or 39 percent was attributable to the
telecommunication and cable industries.

![](media/image2.wmf){width="4.2in" height="3.7472222222222222in"}Of the
\$1.9 trillion in total SNC commitments, U.S. banking organizations[^2]
and foreign banking organizations (FBO) each held 45 percent of the
exposures, and nonbank firms held the remaining 10 percent (see top
panel of Table 1). Since 2000, the share of commitments held by U.S.
banks has fallen somewhat, while the nonbank share has grown. For 2002,
the rate of deterioration for credits held by these groups has differed
markedly, with U.S. banking organizations experiencing an 11 percent
increase in classifieds, compared to 39 percent for FBOs and 68 percent
for nonbanks. Classifications as a percent of commitments also showed a
wide range with U.S. banks exhibiting lower overall problems relative to
FBOs or nonbanks (see bottom panel).

The significantly higher classification rate for nonbanks is consistent
with market observations that nonbanks have largely focused on
subinvestment grade investments and have been purchasers of distressed
loans in the secondary market at discounts to par value; all dollar
amounts in this release are par amounts. In addition, nonbanks and U.S.
banks each held 27 percent of the loss classification, while FBOs held
the remaining 46 percent.

Over the past year, the telecommunication and cable industries
experienced the steepest decline in quality, with three-quarters of the
\$40 billion increase in SNC classifieds attributable to this segment.
For 2002, total classifications for the sector soared to 27.0 percent of
total commitments, compared to 3.9 percent the year before (see bottom
panel of Table 2).

![](media/image3.wmf){width="4.35in" height="3.816666666666667in"}

The second largest increase in classifications was attributable to the
oil, gas, pipelines and utilities industries, with a \$12.7 billion
increase and a classification rate of 7.5 percent, compared to 1.9
percent the year before (see Appendix B). Special mention credits for
this segment more than doubled and amounted to 6.9 percent of
commitments. Although the manufacturing industry exhibits the largest
dollar volume of classified and criticized assets within the SNC
portfolio, the rate of deterioration has diminished markedly from the
prior year, with classifieds growing just 5 percent. The 1.5 percentage
point rise in the manufacturing classification rate to 12.1 percent is
largely a function of an 8 percent decline in outstanding commitments,
rather than a marked growth in problem credits. On the positive side,
classifications in the professional, scientific and other services
industry fell by \$3.9 billion, and classifieds for financial services
and insurance industries declined by \$3.0 billion.

For the most part, banking organizations have been vigilant in
identifying problem credits and reflecting deterioration in the quality
of syndicated loans in their internal credit ratings. A combination of
factors, including strong earnings and capital bases, coupled with
diverse revenue sources and balance sheets have allowed U.S. banking
organizations to absorb deteriorating credit conditions over the past
three years without the disruption experienced a decade ago.
Nevertheless, banking organizations must continue to be vigilant in the
current environment to ensure that they promptly identify and address
any continuation in credit quality deterioration and adjust loans loss
allowance levels appropriately[^3].

[Media Contacts]{.underline} OCC: Kevin Mukri (202) 874-5348

> FDIC David Barr (202) 898-6992
>
> Federal Reserve Dave Skidmore (202) 452-2955

***Appendix A***

### Summary of Shared National Credit Trends

![](media/image4.wmf){width="5.997222222222222in"
height="2.8097222222222222in"}

\# - Data are not available.

***Appendix B***

###  Summary of SNC Industry Trends[^4] 2000-2002 (\$Billions)

##### ![](media/image5.wmf){width="4.204861111111111in" height="9.408333333333333in"}  {#section-1 .unnumbered}

##### Endnotes

[^1]: ^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 Corporation, and the Office of the
    Comptroller of the Currency to provide an efficient and consistent
    review and classification of large syndicated loans. The annual
    program covers loans or loan commitments of at least \$20 million
    that are shared by three or more financial institutions.

[^2]: ^2^ To better reflect ultimate ownership, in this year's press
    release U.S. banks are defined to exclude U.S. chartered
    subsidiaries of foreign banking organizations for the years 2000
    through 2002. Last year's press release data included those
    subsidiaries under U.S. banks, even if they were consolidated under
    the FBO's worldwide banking organization.

[^3]: ^3^ For further guidance, institutions should refer to the July
    12, 1999 Joint Interagency Letter to Financial Institutions on the
    allowance for loan losses, as well as the December 1993 Interagency
    Policy Statement on the Allowance for Loan and Lease Losses.

[^4]: ^4^ Due to the recent conversion of industry classification codes
    (from SIC to NAICS), the specificity of 2002 and 2001 data exceeds
    that available for 2000. Accordingly, consistent year-to-year
    comparisons of industry sector information are not always possible.
    NAICS groupings of industries identified in Appendix B for 2002 and
    2001 are as follows: Telecommunication & Cable (5132 through 51339);
    Manufacturing -- 31 to 33; Professional, Scientific, and Other
    Services -- 54, 55, 56, 61, 62; Oil, Gas, Pipelines, and Utilities
    -- 21 (oil- & gas-related only), 22, 486; Construction, Real Estate,
    Lodging and Transportation -- 23, 48 (excluding 486), 49, 53, 72;
    Finance and Insurance -- 52; All Other -- Remaining NAICS codes**.**