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Appeal of Shared National Credit (First Quarter 2022)


An agent bank appealed the substandard risk rating assigned to a revolving credit during the first quarter Shared National Credit (SNC) examination.


The appeal asserted that a special mention rating is more appropriate. The appeal contended that the credit was no longer a substandard asset based on material improvement in the financial performance and overall credit profile, in the backdrop of a significantly more favorable economic landscape. Specifically, COVID-19 related impacts to the business largely subsided with financial performance returning to pre-pandemic levels. The appeal generally acknowledged the elevated leverage profile. However, the appeal contented that projections suggested substantial deleveraging of total debt within seven years, based on cash flow adjusted for discretionary capital expenditures. The appeal contended that the conclusion of weak performance relative to plan based on 2020 base case projections should instead be based on 2021 revised projections due to the unprecedented uncertainty at the onset of the pandemic in early 2020.

Supervisory Standards

The interagency appeals panel conducted a comprehensive review of the information submitted by the bank and relied on the supervisory standards outlined below:

  • Comptroller’s Handbook, “Commercial Loans” (Narrative—March 1990, Procedures—March 1998)
  • Comptroller’s Handbook, “Leveraged Lending” (February 2008)
  • Comptroller’s Handbook, “Rating Credit Risk” (April 2001, updated June 2017 for nonaccrual status)
  • OCC Bulletin 2013-9, “Guidance on Leveraged Lending”
  • OCC Bulletin 2014-55, “Leveraged Lending: Frequently Asked Questions for Implementing March 2013 Interagency Guidance on Leveraged Lending”
  • OCC Bulletin 2020-35, “Troubled Debt Restructurings: Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working With Customers Affected by COVID-19 (Revised)”
  • OCC Bulletin 2020-64, “Examinations: Interagency Examiner Guidance for Assessing Safety and Soundness While Considering the Effect of COVID-19 on Institutions”
  • OCC Bulletin 2020-72, “Credit Administration: Joint Statement on Additional Loan Accommodations Related to COVID-19”


An interagency appeals panel of three senior credit examiners concurred with the SNC examination team’s originally assigned rating of substandard based on well-defined weaknesses evidenced by the borrower’s weak primary source of repayment, weak performance to plan, and high leverage. Although financial performance has improved since the onset of the COVID-19 pandemic after resuming full operations, performance has not improved to a satisfactory level. Updated projections reflect lower than anticipated cumulative free cash flow available to repay less than 50 percent of outstanding debt over seven years, with negative free cash flow forecasted in 2022 due to increased capital expenditures. Lease adjusted leverage remained high, with near term debt reduction reliant on asset sale proceeds. The company’s 2020 projections considered pandemic related impacts to near term cash flows and liquidity. Financial performance will continue to be impacted by reduced travel demand and intense competition.