The Shared National Credit exams are underway but analysts and traders expect there to be less credit deterioration compared to previous years, putting less pressure on banks to sell off their non-performing assets. A direct link between SNC exams and trading in the secondary market is tenuous, but there were at least some big trades last year attributed to the SNC process. "Banks do sell when their [non-performing assets] are skyrocketing," one trader noted. But one dealer said banks were not as pressured in today's environment and that it was more of an issue last year.
The SNC exam has gained importance in recent years due to the weakened economic period, noted a Federal Reserve Bank of New York spokesman. This is a natural outcome due to more loans made to company's with lower quality, lower rated credits, and the consolidation among banks that leads to a concentration of loans at these banks, he added. The SNC exam is conducted by the Federal Deposit Insurance Corporation, the Federal Reserve Bank, and the Office of the Comptroller of the Currency to ensure consistency in the classification of large syndicated credits.
There have been a few examples of large loan sales that are believed to have been ignited by the SNC process. Last year, a research report issued by Goldman Sachs predicted that banks who had not yet marked Adelphia Communications' bank loans as non-performing would do so after the results of the SNC exam were released. This suggestion preceded Mellon Bank's sell off of roughly $100 million worth of the various facilities under the Adelphia umbrella (LMW, 9/16). Similarly, last month a mass of Charter Communications' various credit facilities traded as one bank was said to be paring exposure to the name in anticipation that the SNC examiners would rank the credits non-performing.
The ratings for last year revealed that the total loan commitments that were classified substandard, doubtful or loss rose by $39.4 billion, an increase of 34%. On the large corporate loan side, there are likely to be less surprises this year, said David Hendler, a CreditSights financial services senior analyst. But there are still some sectors that will likely be under the microscope. "I expect that the regulators will continue to look at loans in the telecom and energy sectors," said Tanya Azarchs, a Standard & Poor's analyst.
Depending on the bank's overall portfolio, some will react differently to the ratings than others, said the New York Fed spokesman. Some traders noted that the way a credit trades should ultimately reflect the fundamentals of that credit. "If a bank is waiting for those ratings to come out then they are just reacting and window dressing," said one trader. But he conceded that if a credit was able to obtain a pass rating, banks would not have the same pressure to sell.