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

Background

A participant bank appealed the special mention rating assigned to a revolving credit facility during the August 2016 SNC examination.

Discussion

The appeal asserted that the credit should be rated pass because the borrower has sufficient cash flow and liquidity to meet funding needs based on projections. The appeal argued that although leverage appears high, it is in line with the collateral’s half-life.

Conclusion

An interagency appeals panel of three senior credit examiners concurred with the SNC examination team’s originally assigned risk rating of special mention.

The appeals panel concluded that the special mention rating is appropriate due to declining financial performance, high leverage, and continued exposure to commodity price volatility. Weak commodity prices is the primary cause for the declining financial trends. In addition, leverage is high and projected to increase further in the near term. The appeals panel determined that liquidity remains tight and that there is no availability under the revolving credit facility. These weaknesses, if uncorrected, may result in deterioration of the repayment prospects of the credit at some future date.

Future anticipated improvement in oil prices and plans to divest certain assets in the near term may strengthen the credit; however, these are future events and the subsequent effect on the borrower’s financial condition is uncertain.