Appeal of Shared National Credit (First Quarter 2017)

Background

A participant bank appealed the substandard rating assigned to a revolving credit facility during the first-quarter 2017 Shared National Credit (SNC) examination.

Discussion

The appeal asserted that a special mention rating was appropriate due to the recent oil and gas reserve acquisition the company completed to substantially improve its production levels, scale, cash flow, collateral position, and liquidity, while significantly reducing its pro-forma leverage position. Also, as part of the acquisition, the borrower broadened its reserve profile and positioned itself to take advantage of a recovery in prices. Further, the appeal asserted that a significant portion of the acquisition was paid through equity and a modest increase in debt. The appeal acknowledged that while the acquisition significantly improved the credit profile of the borrower, the need to fully execute the business plan precludes a pass rating.

Conclusion

An interagency appeals panel of three senior credit examiners concurred with the bank's special mention rating.

The appeals panel concluded that financial projections indicate that the borrower's future cash flow repays the borrowing base commitment under the reserve-based loan within 60 percent of the total proved reserve's economic life and total secured debt within 75 percent of the total proved reserve's economic life. Refer to the "Oil and Gas Exploration and Production Lending" booklet of the Comptroller's Handbook. While financial projections inclusive of the asset acquisition are yet unproven, overall financial metrics of the company are expected to improve with a lower debt profile, better debt coverage, marginal liquidity posture, and fully conforming collateral coverage of the borrowing base. However, financial performance concerns remain. Covenant waivers were required for breached covenants and performance to plan has historically been weak. Liquidity is marginal, but balance sheet cash and availability under the borrowing base are sufficient to fund operations and budgeted future exploration and development costs.