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Leveraged-Lending Risks Remain High, U.S. Bank Regulators Say

Leveraged-Lending Risks Remain High, U.S. Bank Regulators Say

Risks associated with leveraged lending remain a concern for the Federal Reserve and other top federal bank regulators, according to a new government report. 

The Shared National Credit Review, which was released on Monday by the Fed, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp., said that the loans continue to face issues with borrower protections. The lending is often tied to highly-indebted corporations with a “significant portion” of the riskiest loans made by non-bank firms, the report said. 

The study, which involved an examination of large, multi-lender deals, found:

  • Most of those held by banks are higher-rated, with non-banks holding the bulk of the riskiest loans
  • Many leveraged loans “possess weak structures” that “reflect layered risks that include some combination of high leverage, aggressive repayment assumptions, weak covenants, or terms that allow borrowers to increase debt, including draws on incremental facilities”
  • The number of loans and the eroding of safeguards in each transaction are growing

In a positive note, the report found that in the broader review of “shared national credit” the percentage of the weakest “non-pass loans” improved over the previous year. Economic damage from the Covid-19 pandemic magnified the risk in the leveraged transactions, according to the regulators.

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