Loan losses: are they lurking where you're looking? Credit officers discuss the issues

RMA Journal, The, Feb, 2005 by Beverly J. Foster

Blakely believes that the ethical issues surrounding some syndicated lending have come to the fore in this lending facet. In the case of derivatives, Blakely said, "suppose that you're an underwriter of a $500 million deal, and you take down a larger portion than in the past because this relationship is important to you. So perhaps you sell $350 million of it to participating banks, and you're left with $150 million on your books. You feel uncomfortable with that size of an exposure, so you buy a credit derivative to bring down that exposure, to cover $100-125 million or $125 million. What happens when your client gets into trouble? You're on the horns of a dilemma: Do you hope that the client goes under so that your credit derivative pays off, or do you work hard to ensure that you're looking after the client, as well as all your syndication banks? Similarly, if you buy into a large piece of a syndicated deal and buy a credit derivative to protect yourself, does that make you more obstinate when it comes to a workout of that deal because you want it to collapse so that your credit derivative will pay off? This development in the credit derivatives market is creating some interesting dynamics in syndicated lending."

While none of the participants is heavily involved in the syndicated market, Chalk allowed that BB&T has been approached about it. Because of consolidation in the banking industry as well as among corporate clients, Citibank, Bank of America, JPMorgan Chase, and Wachovia now dominate syndicated lending. "More of our clients or prospective clients are asking us to join a syndication," said Chalk. "We have rules about anti-tying; well, the reverse of that is clients telling us that if we hold any kind of noncredit business with their companies, we must be in the syndication. I suspect that a number of regional banks could be getting involved in syndicated lending now. So our challenge is to maintain our discipline and to have the same hold limits for syndicated credits that we would for credits we've made on our own."

Contact Beverly Foster by e-mail at bfoster@rmahq.org.