Leveraged Lending

Price Risk

Price risk is the current and prospective risk to earnings or capital arising from changes in the value of traded portfolios of financial instruments. This risk arises from market making, dealing, and position-taking in interest rate, foreign exchange, and equity and commodities markets.

Price risk associated with underwriting syndicated leveraged loans can be high because changes in investor appetite can impair the originator’s ability to sell down positions as planned. Originators of leveraged loans commit credit terms to borrowers, and then must syndicate the loans with those terms to the investor community.

Occasionally, investor appetite for credit risk can suddenly change, sometimes sharply, and originators find that they cannot syndicate at acceptable prices the loans held in their pipeline. When this happens, originators can try to renegotiate terms with the borrower. However, except in unusual circumstances, borrowers or their financial sponsors have limited incentive to make changes to credit terms that have become very favorable in light of the changes in market conditions. Alternatively, originators can sell the assets at a loss, hold the “stuck” loans in a held-for-sale account, or reassess their planned portfolio hold level.

There are a number of unique accounting issues with respect to accounting for syndicated loans. Refer to Appendix C, “Accounting for Leveraged Lending,” for more detailed information.

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