Leveraged Lending

Reports on Leveraged Finance Transactions

Higher risk credits, including leveraged finance transactions, require frequent monitoring by banking organizations. Bank management and the board of directors should receive comprehensive reports about the characteristics and trends in such exposures, generally at least quarterly. These reports should include at a minimum:

Total exposure and segment exposures, including subordinated debt and equity holdings, compared to established limits.

Risk rating distribution and migration data.

Portfolio performance — noncompliance with covenants, restructured loans, delinquencies, non-performing assets, impaired loans, and charge-offs.

Compliance with internal procedures and the aggregate level of exceptions to policy and underwriting standards.

Banks with significant exposure levels to higher-risk credits should consider additional reports covering:

Collateral composition of the portfolio, e.g., percentages supported by working assets, fixed assets, intangibles, blanket liens, and stock of the borrower’s operating subsidiaries.

Unsecured, partially secured, or “air ball” exposures, including potential collateral shortfalls caused by defaults that trigger pari passu collateral treatment for all lender classes.

Absolute amount and percentage of the portfolio dependent on refinancing, recapitalization, asset sales, and enterprise value.

Absolute amounts and percentages of scheduled and actual annual portfolio amortizations.

Secondary market pricing data and trading volume for loans in the portfolio when available.

Loan performance and exposure by individual sponsor.

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