Fed flags businesses’ $1 trillion of debt
The Federal Reserve and other bank regulators are flashing a new warning sign for the U.S. economy: Businesses ravaged by COVID-19 are sitting on $1 trillion of debt, and a high percentage of it is at risk of going bust.
Watchdogs flagged 29.2 percent of complex corporate lending as troubled in 2020, up from 13.5 percent in 2019, a report released Thursday by the Fed and other agencies shows. Real estate, entertainment, transportation, oil and gas, and retail were cited as particular problem areas. A “disproportionate share” of the riskiest loans were held by nonbanks, such as investment funds that engage in leveraged lending, insurers and pension funds, the regulators added.
“While risk has increased, many agent banks have strengthened their risk management systems since the prior downturn and are better equipped to measure and mitigate risks associated with loans in the current environment,” the Fed, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency said in a statement that accompanied the release of their Shared National Credit Review.
Still, banks’ share of the weakest loans has also been rising, with some of their holdings — particularly those associated with oil and gas — facing credit downgrades during the pandemic, the report found. Banks’ percentage of borrowings deemed below the standards preferred by regulators increased to 45 percent from 35 percent a year earlier.
For their report, the Fed and other agencies evaluated $5.1 trillion in complex lending involving multiple companies, with half of it representing leveraged loans. Real estate, entertainment, transportation, oil and gas, and retail represented 21.6 percent of the lending that the regulators examined.
The 29.2 percent of “nonpass loans” highlighted in the report represent those the agencies categorize as meriting “special mention,” being substandard or at risk of triggering lender losses.
During the pandemic, the debt load involving leveraged lending — borrowings by the riskiest companies — has been on the upswing. In so-called syndicated loans backing U.S. acquisitions, leverage surged to at least a five-year high in the fourth quarter, according to Covenant Review.
Though bank regulators once insisted on limits for leveraged lending, those standards are no longer enforced. Nonbanks were never forced to comply with the restrictions because such firms aren’t directly regulated by the Fed, the FDIC and the OCC.