Credit Quality Weakens Slightly Among Borrowers Owing Over $100 Million

The credit risk associated with large, syndicated bank loans remains moderate, although there are some continuing trends in weakened credit quality, three federal bank regulatory agencies said Monday (March 10).

That’s according to a Monday press release from the Federal Reserve Board, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, which outlined findings from the 2024 Shared National Credit Program report. The report assesses risk in the largest and most complex credit facilities shared by regulated financial institutions and nonbank investors.

The program reviews borrowers with minimum aggregate loan commitments totaling $100 million or more and shared by three or more banks, according to the report.

During 2024, the share of total commitments rated “special mention and classified (non-pass)” increased from 8.9% to 9.1%, the report said. Special mention commitments “have potential weaknesses that deserve management’s close attention,” while a non-pass loan “is any loan rated special mention, substandard, doubtful or loss.”

The report attributed the weakened credit quality trends to the pressure of high interest rates on leveraged borrowers and the compressed operating margins in some industry sectors.

It highlighted four sectors seeing weakened credit quality: technology, telecom and media; commercial services; healthcare and pharmaceutical; and materials and commodities excluding oil and gas.

The report also said the office sub-sector of the commercial real estate sector continues to show a decline in credit quality, although the sector as a whole remains slightly below the portfolio average in terms of special mention and classified commitments.

“The magnitude and direction of risk in 2025 is likely to be impacted by borrowers’ ability to manage interest expense, real estate conditions and other macroeconomic factors,” the report said. “These elements will continue to impact the financial performance and repayment capacity of borrowers in a wide variety of industries, especially highly leveraged borrowers that may lack the financial flexibility to respond to external challenges.”

It was reported in January that many lenders still have lukewarm expectations for loaning money, although they hope to see loan growth as the year goes on due to factors like optimism among their clients.

In November, it was reported that commercial property loan defaults were at their highest point in 10 years and that lenders seemed to be offering breaks to property owners for the sole purpose of delaying a write-off.