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Appeal of Shared National Credit (SNC)-(Second Quarter 2016)


An agent bank appealed the split substandard/doubtful ratings and the nonaccrual designation assigned to a revolving credit during the February 2016 SNC examination.


The appeal asserted that the entire revolving credit should be rated substandard and remain on accrual. The appeal acknowledged that the borrower exhibited well-defined weaknesses, with projections demonstrating insufficient operating cash flow and liquidity to fund capital expenditures (capex) and repay senior and total debt. The appeal also acknowledged that the company’s financial performance has deteriorated due to the sharp decline in oil and gas prices.

The appeal argued that the collateral would be sufficient to cover the revolver if a different collateral valuation method and process were used. The appeal stated that the bank’s practice is to rate credits at the time of redetermination rather than mid-cycle, because of changes in commodity prices.


An interagency appeals panel of three senior credit examiners concurred with the SNC examination team’s originally assigned substandard/doubtful risk ratings and nonaccrual treatment.

The appeals panel determined that the borrower’s significant operating losses, elevated leverage, constrained liquidity, and inability to amortize total debt over a reasonable time frame are well-defined weaknesses warranting the substandard classification. In addition, the appeals panel concluded that the SNC examination team appropriately valued the collateral using December 31, 2015, New York Mercantile Exchange strip pricing and that the value was below the committed amount of the revolver. Given the well-defined credit weaknesses, the portion of the revolver not secured by collateral supports a doubtful rating.

The company is highly leveraged with an unsustainable debt structure. Liquidity is strained in the immediate and near term with no access to the capital markets. The appeals panel concurred that nonaccrual treatment (any future payments to principal) is warranted because payment in full of principal and interest is highly questionable given deficient operating cash flow and the lack of liquidity to fund capex and repay senior and total debt.

The appeals panel also determined that the bank’s practice of not evaluating credit facilities between redetermination periods ignores the fact that price volatility can occur at any point in the cycle. The appeals panel noted that prudent banking practice includes the use of reasonable price decks that are adjusted semiannually or as needed.