###  Board of Governors of the Federal Reserve System

### Joint Release Federal Deposit Insurance Corporation

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

# 

For Immediate Release October 5, 2001

NR 2001-87

Bank Regulators' Data Show Continued Increase in Adversely Classified
Syndicated Bank Loans in 2001

WASHINGTON \-- The 2001 Shared National Credit (SNC)[^1] review
indicates continued deterioration in the quality of syndicated bank
loans, consistent with general economic, sectoral, and credit market
trends, according to data released Friday by three federal bank
regulatory agencies.

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 in the second quarter and reflect business and economic
conditions that prevailed at that time.

Several key factors have adversely affected the quality of syndicated
loans over the past several years including bank underwriting and risk
selection standards, and economic factors. The seasoning of many
aggressively underwritten deals, particularly those credits booked in
the latter half of the 1990s, has contributed to the increase in
adversely rated credits.[^2]

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 in the current environment.
It is important to note that most of the deterioration in the quality of
syndicated loans is already reflected in the internal credit ratings of
individual banks.

![](media/image1.wmf)

In 2001, the SNC Program covered 10,146 credits to 5,870 borrowers
totaling \$2.1 trillion in loan commitments. Approximately one-third of
the commitments, or \$769 billion, was advanced and outstanding.
Classified loans totaled \$117 billion, or 5.7 percent of total
commitments, up from 3.2 percent in 2000. At the same time, loans listed
for special mention rose to 3.7 percent of total commitments, from 1.9
percent in 2000. On a combined basis, special mention and classified
loans represent 9.4 percent of total commitments, up from 5.1 percent a
year ago but well below the peak of 16 percent in 1991 (see Chart 1 and
Appendix A).

Of the \$2.1 trillion in total SNC commitments, 51 percent is held by
U.S. banks, 41 percent is held by foreign banking organizations, and
non-bank firms hold the remaining 8 percent. In 2001, 5.4 percent of
U.S. bank holdings were classified compared to 4.4 percent for foreign
banking organizations and 14.5 percent for non-bank firms.

The weakening economy has had a greater impact on certain industry
sectors (refer to Appendix B for broad industry trends). In particular,
manufacturing companies have experienced increased credit problems since
the previous SNC review, especially the textile and apparel, primary and
fabricated metals, and machinery and equipment sub-sectors. Weakness in
the manufacturing sector was also driven by asbestos litigation
associated with various large borrowers.

Problems in the information technology sector (specifically the
telecommunications industry) have been well documented and are evident
in the substantial increase in adversely rated credits for 2001, albeit
from low levels. While many established companies remain strong, a large
number of start-up entities are experiencing difficulty generating
sufficient cash flow for operations and debt service, and may be
vulnerable to further deterioration in the event of a sustained economic
slowdown.

Despite deterioration in the aggregate syndicated loan market,
improvement is noted in several industries; the most noteworthy of which
is healthcare. This sector shows signs of improvement associated with
realization of merger and acquisition synergies and increased revenues,
although the volume of adversely rated credits within this sector
remains relatively high. The low volume of adversely rated borrowers
within the real estate market remained relatively unchanged from last
year.

For U.S. banks, the rapid deterioration in large syndicated loans comes
at a time when the majority of banks have strong capital bases and
earnings. While this moderates concerns, banking organizations must
remain 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]

-0-

[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

+-------+-------+-------+-------+-------+-------+-------+-------+-------+
| ###   |       |       |       |       |       |       |       |       |
| # Com |       |       |       |       |       |       |       |       |
| mitte |       |       |       |       |       |       |       |       |
| d Bal |       |       |       |       |       |       |       |       |
| ances |       |       |       |       |       |       |       |       |
|       |       |       |       |       |       |       |       |       |
| #     |       |       |       |       |       |       |       |       |
| ### ( |       |       |       |       |       |       |       |       |
| Dolla |       |       |       |       |       |       |       |       |
| rs in |       |       |       |       |       |       |       |       |
|  Bill |       |       |       |       |       |       |       |       |
| ions) |       |       |       |       |       |       |       |       |
+-------+-------+-------+-------+-------+-------+-------+-------+-------+
| Year  | Sp    | Su    | Dou   | Loss  | Total | Total | Total | Total |
|       | ecial | b-sta | btful |       | Class | Adve  | Comm  | O     |
|       | Me    | ndard |       |       | ified | rsely | itted | utsta |
|       | ntion |       |       |       |       | Rated |       | nding |
+-------+-------+-------+-------+-------+-------+-------+-------+-------+
| 1991  | 49.2  | 65.5  | 10.8  | 3.5   | 79.8  | 129.0 | 806   | \#    |
+-------+-------+-------+-------+-------+-------+-------+-------+-------+
| 1992  | 50.4  | 56.4  | 12.8  | 3.3   | 72.5  | 122.9 | 798   | \#    |
+-------+-------+-------+-------+-------+-------+-------+-------+-------+
| 1993  | 31.4  | 50.4  | 6.7   | 3.5   | 60.6  | 92.0  | 806   | 331   |
+-------+-------+-------+-------+-------+-------+-------+-------+-------+
| 1994  | 31.5  | 31.1  | 2.7   | 2.3   | 36.1  | 67.6  | 893   | 298   |
+-------+-------+-------+-------+-------+-------+-------+-------+-------+
| 1995  | 18.8  | 25.0  | 1.7   | 1.5   | 28.2  | 47.0  | 1,063 | 343   |
+-------+-------+-------+-------+-------+-------+-------+-------+-------+
| 1996  | 16.8  | 23.1  | 2.6   | 1.4   | 27.1  | 43.9  | 1,200 | 372   |
+-------+-------+-------+-------+-------+-------+-------+-------+-------+
| 1997  | 19.6  | 19.4  | 1.9   | 0.9   | 22.2  | 41.8  | 1,435 | 423   |
+-------+-------+-------+-------+-------+-------+-------+-------+-------+
| 1998  | 22.8  | 17.6  | 3.5   | 0.9   | 22.0  | 44.8  | 1,759 | 561   |
+-------+-------+-------+-------+-------+-------+-------+-------+-------+
| 1999  | 31.3  | 31.0  | 4.9   | 1.5   | 37.4  | 68.7  | 1,829 | 629   |
+-------+-------+-------+-------+-------+-------+-------+-------+-------+
| 2000  | 36.3  | 47.9  | 10.8  | 4.7   | 63.4  | 99.7  | 1,951 | 705   |
+-------+-------+-------+-------+-------+-------+-------+-------+-------+
| **2   | **7   | **8   | **2   | **    | **11  | **19  | **2,  | **    |
| 001** | 5.5** | 6.9** | 2.6** | 7.8** | 7.3** | 2.8** | 050** | 769** |
+-------+-------+-------+-------+-------+-------+-------+-------+-------+

\# - Data are not available.

######## ***Appendix B***

###  Summary of Shared National Credit Industry Trends 2000-2001

  --------------------------------- -------- --------- ------------ -------- --------- ------------
  **Adversely rated credits**                                                          

  **Industry** [^4]                 **2001                                             
                                    2000**                                             

                                    All      Special   Classified   All      Special   Classified
                                    Credit   Mention                Credit   Mention   

  **[Utilities &                                                                       
  Transportation]{.underline}**                                                        

  Amount                            199.0    9.5       5.9          174.5    1         4

  Percent                           100%     4.8%      3.0%         100%     0.6%      2.3%

                                                                                       

  **[Construction, Real Estate,                                                        
  Lodging]{.underline}**                                                               

  Amount                            116.3    4.3       1.9          106.4    1.0       1.4

  Percent                           100%     3.7%      1.6%         100%     0.9%      1.3%

                                                                                       

  **[Manufacturing]{.underline}**                                                      

  Amount                            556.3    26.5      59.5         574.7    18.3      19.6

  Percent                           100%     4.8%      10.7%        100%     3.2%      3.4%

                                                                                       

  **[Financial Services &                                                              
  Insurance]{.underline}**                                                             

  Amount                            497.3    6.5       12.7         504      2.4       14.3

  Percent                           100%     1.3%      2.6%         100%     0.5%      2.8%

                                                                                       

  **[Information]{.underline}**                                                        

  Amount                            180.0    12.2      6.9          139.7    3.4       2.1

  Percent                           100%     6.8%      3.8%         100%     2.4%      1.5%

                                                                                       

  **[Professional, Scientific, &                                                       
  Other Services]{.underline}**                                                        

  Amount                            193.0    9.5       17.9         180.2    4         13.2

  Percent                           100%     4.9%      9.3%         100%     2.2%      7.3%

                                                                                       

  **[All Other]{.underline}**                                                          

  Amount                            308.6    6.9       12.7         266.6    6.1       8.7

  Percent                           100%     2.2%      4.1%         100%     2.3%      3.3%

                                                                                       

  **[All Industry]{.underline}**                                                       

  Amount                            2050.5   75.4      117.6        1946.1   36.2      63.3

  Percent                           100%     3.7%      5.7%         100%     1.9%      3.3%

                                                                                       
  --------------------------------- -------- --------- ------------ -------- --------- ------------

## 

##### Endnotes

[^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]: 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.

[^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]: Due to the recent conversion of industry classification codes
    (from SIC to NAICS), the specificity of 2001 data exceeds that
    available for 2000. Accordingly, consistent year-to-year comparisons
    of industry sector information are not always possible. Broad NAICS
    groupings of industries identified In Appendix B for 2001 are as
    follows: Utilities and Transportation -- 22, 48, 49; Real Estate --
    23, 53, 72; Manufacturing -- 31-33; Finance and Insurance -- 52;
    Information -- 51; Professional, Scientific, and Other Services --
    54, 62; All Other -- Remaining NAICS codes.