U.S. regulators will probably enforce higher underwriting standards for leveraged loans as they undertake an annual review, according to Moody’s Investors Service.
The Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency may impose stricter discipline in the Shared National Credit review of syndicated loans, the results of which will be out “shortly,” Moody’s said in a statement.
This “would be credit positive as more aggressive underwriting in this sector has increasingly threatened to undermine the balance sheet repair that U.S. banks have undertaken,” according to a report dated today.
Regulators released updated lending guidelines last year, citing concern that “prudent underwriting practices have deteriorated,” according to a March 2013 statement. Bank supervisors have been insisting on minimum standards to avoid a repeat of the losses that occurred during the credit crisis as a sixth year of near-zero interest rates from the Fed fuels demand for higher-yielding assets.
The suggested guidance hasn’t stopped lenders from completing riskier deals, such as loans that lack protections for investors such as limits on the amount a company can borrow relative to their profitability.
Banks have arranged about $175.6 billion of such loans this year, the first time more than half of issuance lacked typical lender protections, according to Bloomberg data. There were $315.4 billion of that type of loans arranged in 2013.
Defaults by borrowers of these high-risk credits are more frequent than on all of their speculative-grade peers, according to a Moody’s report in June.
“To date, the non-binding guidance has not halted looser underwriting practices,” Moody’s analysts including Allen Tischler and Christina Padgett wrote in the report. “This year’s credit review will allow regulators to set a more disciplined tone.”