Appeal of Shared National Credit (Third Quarter 2023)

Background

The participant bank appealed the substandard rating assigned to an asset-based revolving credit facility during the third quarter Shared National Credit (SNC) examination.

Discussion

The appeal asserted that a special mention rating was more appropriate, considering the adequate collateral liquidity profile and robust controls. The appeal specifically argued that controls implemented by the bankruptcy court provided protections and mitigation similar to those of a properly margined, fully monitored asset-based loan. Additionally, the company operated within an approved budget during bankruptcy, securing both liquidity and a clear path for exiting bankruptcy.

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, “Asset-Based Lending” (January 2017)
• Comptroller’s Handbook, “Rating Credit Risk” (April 2001, updated June 2017 for nonaccrual status)

Conclusion

An interagency appeals panel of three senior credit examiners confirmed the substandard rating based on the borrower’s weak operating performance, weak liquidity, and borrowing base over-advance. While controls established by the bankruptcy court may be similar to asset-based lending controls, they do not support a risk rating lift to special mention due to the absence of financial information substantiating reasonable liquidity trends or improved operating performance.