a quick guide to best practices for leveraged lending and snc

Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending

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A QUICK GUIDE TO BEST PRACTICES FOR LEVERAGED LENDING AND SNCFROM THE RMA CREDIT RISK COUNCIL’S2016 INDUSTRY INSIGHTS


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• It’s been three years since the OCC, FRB, and the FDIC issued guidance on leveraged lending.

Banks have now had time to undergo exams and get feedback from respective regulators on this topic.

LEVERAGED LENDING AND SHARED NETWORK CREDIT (SNC)


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LEVERAGED LENDING FOCUS REMAINS

Leveraged lending continues to be a focus in exams and in other regulatory commentary.


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COMPANIES WITH HIGHER LEVERAGE AT MOST RISK

While we could debate the actual thresholds set from a senior and a total debt perspective, we can all agree that companies with higher

leverage are more at risk in a weaker economy than companies with less leverage.


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BEST PRACTICE: IDENTIFICATION AND TRACKING

Proper identification of leveraged loans at inception,

including appropriate enterprise valuation and

continued portfolio tracking of leveraged loans, is critical.


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BEST PRACTICE: ESTABLISH LIMITS

Establish limits for:

• The total leverage portfolio, either as a percentage of the total portfolio or Tier I capital.

• Property type.

• Geography.


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BEST PRACTICE: DO A POST MORTEM

Post mortems on credits that have migrated to criticized or

classified status are a good tool to reassess the appropriateness

of higher leverage in certain industries.


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BEST PRACTICE: REVIEW THE BANK’S INDUSTRY EXCLUSIONS

Review the

bank’s industry exclusions.

Allowable under the regulation to ensure that an industry with higher leverage continues to perform as expected.


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SNC RECENT ISSUES: ENERGY SECTOR

Recent Shared National Credit (SNC) exams and feedback have placed great emphasis on the energy sector and, therefore, energy-related SNCs (and leveraged loans).


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ENERGY ISSUES: PRICES

Midstream portfolios seem

unaffected.

But, it is reasonable to

assume that an extended

duration of low oil and gas prices will

impact midstream

companies.


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Oil field services companies already feel

the impact.

ENERGY ISSUES: PRICES (CONT.)


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ENERGY ISSUES: THE CONTAGION EFFECT

Related to energy concerns is the:

Contagion effect on regions and markets economically linked to the

energy industry.


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BEST PRACTICE: SOUND UNDERWRITINGSound underwriting practices, frequent monitoring, and the ability to understand the impact of oil and gas prices, (i.e., sensitivity analysis) on the upstream portfolio is important; it allows a thorough analysis of projected cash flows.


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BEST PRACTICE: CLOSELY MONITOR PORTFOLIOS

Closely monitor both consumer and commercial

real estate portfolios in regions and markets

economically linked to the energy industry for

any signs of negative trends.


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HVCRE ISSUES

HVCRE regulation continues to

instill discipline in structure.

Regulation requires cash equity to stay

in transactions through

construction.


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BEST PRACTICE: MAINTAIN REASONABLE CRE PORTFOLIO CONCENTRATIONS

Maintaining reasonable CRE portfolio concentrations as a percentage of the total book will help minimize the impact

of increased provisions due to CRE credits moving to the

watch list.


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LEVERAGED LENDING AND SNC SUMMARY

In general, continued close monitoring of CRE portfolios remains a priority.

Be proactive in origination practices from a portfolio diversification perspective. Ongoing monitoring should prove positive for the credit quality of the total portfolio over time.


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The Credit Risk Council supports professionals who are responsible for establishing, maintaining, or carrying out credit risk management policies.

The council focuses on funded and off-balance-sheet risk management, including capital markets activity, and other forms of credit intermediation and risk mitigation.

About RMA’s Credit Risk Council


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a quick guide to best practices for leveraged lending and snc

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