Bank Risk From Leveraged Loan Refinancing is Manageable
U.S. financial institutions’ exposure to refinancing risk from broadly syndicated leveraged loans has significantly declined over the past two years, in Standard & Poor’s Ratings Services’ view, making it unlikely that these institutions would suffer serious losses in the event that corporate issuers can’t refinance maturing loans.
“However, another severe disruption in the capital markets–which we view as unlikely at this point–could endanger commercial and industrial (C&I) lending, as well as further constrain consumer spending and make refinancing that much harder. But for now, we believe that U.S. financial institutions holding maturing leveraged loans that could encounter refinancing difficulties have a variety of risk management alternatives available, including sales of these assets to interested investors or the possibility of agreeing to modified loan terms (”amend and extend”) as an alternative to default.”
According to Standard & Poor’s Global Fixed Income Research (GFIR), approximately $973 billion of speculative-grade (original par amount) borrowings mature between 2011 and 2014. At origination, this maturing debt consisted of around $521 billion in term loans, $340 billion of bonds, and $112 billion in revolving credit facilities–all held by institutional and non-institutional investors, including financial institutions.
U.S. banks have already implemented aggressive measures to shed this loan risk and will, we believe, continue to do so when and where warranted.
Since 2007, when the credit crisis began to develop, banks increasingly applied strategies targeted to freeze and/or pare back unwanted credit exposures.
Risk mitigation strategies have included selling large leveraged loan exposures to a variety of third-party institutional investors and asset management firms. Often, in order to facilitate these asset sales, financial institutions provided nonrecourse financing in the form of either low to moderately leveraged loan structures and/or mark-to-market total return swap facilities (TRS). Under the TRS facilities, a bank typically retains the actual loan obligation on its balance sheet, but transfers the credit risk on a nonrecourse basis to a third party, who would then be subject to mark-to-market advance rate requirements.
For details, see For Now, U.S. Financial Institutions Seem Poised To Manage Upcoming Corporate Loan Maturities (Premium)
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