Next Commercial Credit Bust to be Softened by 2013 Leveraged Lending Guidance

Summary of 2015 Shared National Credit Review[1],[2]

In 2013, bank regulatory agencies (the “Regulators”) released the Interagency Guidance on Leveraged Lending (the “Guidance”) intended to curtail perceived excesses in bank lending practices. One of the most impactful elements of the Guidance was the rule that banks should not make “non-pass” loans. The Guidance defined “pass” loans as loans in which the borrower demonstrated the ability to repay all of its senior debt and one-half of its total debt in a five to seven year period.
The Guidance initially proved confusing and banks did not immediately adopt its recommendations to the Regulators’ satisfaction. After the Regulators criticized banks for non-compliance in the 2014 Shared National Credit Review (the 2014 “SNC Review”), banks appear to have gotten the message. After the 2015 SNC Review, Comptroller of the Currency Thomas Curry stated, “[T]he 2015 SNC Review found lower levels of leverage and improved repayment capacity in bank leveraged loan portfolios.”
Statistics compiled by the Loan Syndications and Trading Association shown in the charts below support the findings of the 2015 SNC Review.

[1] Coffey, Meredith, “SNC: Banks Complying With LLG Rules… But SNC Suggests Rules Might Change”, November 2015; Loan Syndication and Trading Website at http://www.lsta.org/news-and-resources/news/1/snc-banks-complying-with-llg-rules-but-snc-suggests-rules-might-change

[2] Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Shared National Credits Program 2015 Review, November, 2015 at http://www.occ.treas.gov/news-issuances/news-releases/2015/nr-ia-2015-149a.pdf