Syndicated Credits Deteriorate, But at a 

Slower Pace 

October 8, 2002 

Large banking organizations are continuing to feel the effects of the recession, as 

syndicated loan quality remains generally weak. In recent years, the results of 

annual interagency Shared National Credit (SNC) reviews have shown how 

problems in the corporate sector have hurt large bank commercial credit quality.1

The results of the 2002 SNC review, released today, show this year's program 

covered a total of $1.9 trillion in loan commitments, of which 12.6 percent were 

criticized (Chart 1). This year's volume of criticized loans represents a 23 percent 

increase from the previous year, while the 2001 review, which showed 9.4 percent 

of total commitments as criticized, revealed a 93 percent increase in criticized 

loans from the previous year. Criticized loans include those adversely classified by 

examiners as Substandard, Doubtful, or Loss and loans rated Special Mention. 

Adversely 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. 

D

Of particular note in this year's review was a record $19.6 billion in credits 

classified as Loss, up $11.6 billion from the prior year. Thirty-nine percent of that 

amount was attributable to the telecommunications and cable industries. These 

two industries contributed 75 percent of the total increase in adversely classified 

loans. In addition to the sluggish recovery, accounting irregularities and the aftereffects of the September 11 attacks also contributed to weaknesses in syndicated 

credits. 

The 2002 SNC results also suggest that deterioration has been particularly evident 

for credits to leveraged and speculative grade borrowers that are having difficulty 
generating sufficient cash flow to service debts. These issues were analyzed in the 

FDIC's Third Quarter 2002 edition of the Regional Outlook, which pointed to the 

rapid increase in speculative bond defaults since 1996 and the recent high ratio of 

bond ratings downgrades to upgrades.2 The Regional Outlook noted that Moody's

expects $141 billion of U.S. speculative grade corporate bonds and rated bank 

debt will come due in 2002 through 2004. Some of these corporations may face 

difficulty rolling over maturing credits if market conditions remain risk averse. 

Banks continue to show signs that they are, in general, effectively managing the 

credit risks in commercial loan portfolios. Regulatory surveys suggest that banks 

have tightened underwriting standards for commercial loans in recent years. In an 

address last month to the Risk Management Association, FDIC Chairman Donald 

E. Powell discussed how innovations in loan syndication and securitization have 

also allowed banks to diversify their asset holdings.3 In addition, nonbanks, which 

include institutional investors, have come to play a larger role in the syndicated 

loan market, driving the share of SNC credits held by U.S. banks steadily 

downward, to 45 percent in 2002. Nonbanks also hold a proportionally higher 

share of problem SNCs. For example, 6.5 percent of U.S. banking organizations' 

SNC commitments were adversely classified during the 2002 review. In contrast, 

nonbanks, which held 10 percent of total commitments in 2002, had 23 percent of 

their commitments adversely classified. 

Despite the continued weaknesses of the corporate sector and commercial credit 

quality, the outlook may be improving. Declining default rates for speculative grade 

bonds appear to bode well for the future performance of syndicated loans, which 

tends to follow bond default trends over the credit cycle. Nevertheless, recent 

disappointing economic news and reductions in corporate earnings forecasts 

suggest that the economic recovery could take time to gather steam. While 

commercial credit quality remains weak at present, the slowing rate of deterioration 

in the performance of SNC credits is a hopeful sign that the worst may be behind 

us. 

The full text of the Interagency Press Release on the 2002 Shared National Credit 

review can be found at: http://www.fdic.gov/news/news/press/2002/pr10402.html.

The Chairman's statement on the 2002 National Credit Review can be found at: 

http://www.fdic.gov/news/news/press/2002/pr10502.html. 

1 The 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 regulated institutions. 

2 "The Road to Recovery for Commercial Credit Quality: Not without a Few Hurdles Ahead." FDIC Regional 

Outlook, Third Quarter 2002. 

3 The full text of Chairman Powell's September 23rd remarks to the Risk Management Association is available 

at: http://www.fdic.gov/news/news/speeches/archives/2002/sp23sep02.html.
Chart 1

Chart 1:Criticized Syndicated Loans Continued to Rise in 2002

Percent of Commitments Classification Volume ($ Billions) 

Review 

Year

Special 

Mention

Adversely 

Classified

Total 

Criticized

Special 

Mention

Adversely 

Classified

Total 

Commitments

1991 6.10 9.90 16.00 49.2 79.8 806.0

1992 6.32 9.09 15.41 50.4 72.5 798.0

1993 3.90 7.52 11.42 31.4 60.6 806.0

1994 3.53 4.04 7.57 31.5 36.1 893.0

1995 1.77 2.65 4.42 18.8 28.2 1,063.0

1996 1.40 2.26 3.66 16.8 27.1 1,200.0

1997 1.37 1.55 2.92 19.6 22.2 1,435.0

1998 1.30 1.25 2.55 22.8 22.0 1,759.0

1999 1.71 2.04 3.75 31.3 37.4 1,829.0

2000 1.86 3.25 5.11 36.3 63.4 1,951.0

2001 3.68 5.74 9.42 75.4 117.6 2,050.0

2002 4.22 8.40 12.62 79.0 157.1 1,871.0

Source: 2002 SNC Program