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Appeal of Shared National Credit (SNC) (Third Quarter 2015)


An agent bank appealed the substandard rating assigned to a revolving credit and two term-loan facilities during the 2015 Shared National Credit (SNC) examination.


The appeal disagreed with the substandard rating because the company’s operating performance had improved sufficiently to generate a satisfactory level of cash flow to service debt and de-lever in a timely and sustainable manner. The appeal also stated that the company had adequate liquidity to meet near term debt maturities, was readily capable of accessing debt capital markets for additional funds, and had reduced fixed costs. Taken all together, the appeal suggested a less severe rating of special mention as more reflective of the company’s risk profile.

The appeal also referenced OCC Bulletin 2014-55, “Frequently Asked Questions for Implementing March 2013 Interagency Guidance on Leveraged Lending,” dated November 7, 2014, specifically question 18. The appeal stated that the borrower had many of the characteristics listed therein to mitigate its insufficient total debt repayment capacity, including the quality and access to liquid assets, demonstrated sponsor and guarantor support, strength and stability of cash flows, and the ability to curtail costs and dividends.


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

The appeals panel acknowledged several points made in the appeal. The company had recently improved domestic operating performance and foreign sources of incremental cash flow. Leverage declined but remained high. The company had demonstrated its access to the debt capital markets even when its risk profile was worse. While the borrower evidenced projected ability to retire 177 percent of senior secured debt within seven years, only 20 percent of the company’s total debt was senior secured. Only 42 percent of the total debt was projected to be repaid within the same period.

The “Interagency Guidance on Leveraged Lending,” dated March 2013 (guidance), provides background and direction on risk rating leveraged loans. Generally, facilities will not be criticized if base-case cash flow projections demonstrate the ability to fully amortize senior secured debt or repay a significant portion of total debt over the medium term. The guidance contains a framework for assessing repayment capacity, which includes tests for both senior secured and total debt repayment within a reasonable period. The relative weight assigned to the senior debt repayment capacity versus total debt repayment capacity is a function of the total debt structure of the obligor. In this case, only 20 percent of total debt is senior secured.

The appeals panel concluded that despite operating performance, leverage, and liquidity improvements, sufficient progress had not been made in remediating the primary well-defined weakness first identified several years ago, an inability to de-lever within a reasonable period. The company’s deleveraging capacity remained insufficient, even after accounting for the effect of various restructuring activities and debt-to-equity conversions. This had resulted in reduced debt levels, reduced interest expense, and improved cash flow coverage metrics. The improvements to the company’s financial statements were not the result of improved cash flow generation but due to reduced senior secured debt achieved by restructuring total debt with non-bank debt and converting debt to equity.