U.S. regulators still concerned about banks' leveraged loans

By Greg Roumeliotis (Reuters) - U.S. federal agencies said on Friday that risky leveraged loans accounted for the same proportion of credits in their 2014 review as they did in last year's examination, but warned banks that they would carry out more reviews as risky loans kept rising in absolute terms. Making junk-rated loans to companies, which are often owned by private equity firms, is a lucrative, high-margin business for major Wall Street banks. But regulators are worried that the underwriting guidance they issued last year is not being heeded. The examination by three federal regulators, the 2014 Shared National Credit review, spans data collected between January and March of this year. "The review showed gaps between industry practices and the expectations for safe-and-sound banking articulated in the 2013 guidance," the regulators wrote in their report, which does not mention individual banks. Leveraged loans accounted for $254.7 billion, or 74.7 percent, of criticized assets in the 2014 review, compared with $227 billion, or 75 percent, of criticized assets in 2013, the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency said in a statement. Officials cautioned, however, that the methodologies used in the two reviews were not identical and advised against trying to make apples-to-apples year-on-year comparisons. Reuters reported in August that Wall Street banks expected the 2014 review's findings to be comparable to last year's. Under the regulatory guidance, loans can be criticized or considered "non-pass" if a company cannot amortize or repay from free cash flow all senior debt or half its total debt in five to seven years. Leverage in excess of six times a company's annual earnings before interest, tax, depreciation and amortization (EBITDA) also raises concerns for most industries, according to the guidance. In the report, regulators said 54 percent of leveraged loans originated since June 2013 with leverage in excess of six times EBITDA were criticized. In addition to increasing the frequency of the reviews of banks' loan books to more than once a year, regulators said they released a "frequently asked questions" document that covered definitions of leveraged loans, supervisory expectations on the origination of non-pass leveraged loans, and other topics. (Reporting by Greg Roumeliotis in New York; Editing by Chizu Nomiyama and Leslie Adler)