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


Several participant banks appealed the special mention rating assigned to two credit facilities during the August 2016 SNC examination.


The appeals asserted that the credits should be risk rated pass because the company has strong operating momentum, above-plan performance, and free cash flow generation based on existing market metrics. The company's cash burn is the result of rapid expansion into new markets. The appeals argued that liquidity is very strong considering cash and availability under the revolver and that the company has consistently proven its ability to raise equity capital.


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

The appeals panel concluded that the credits should be rated special mention notwithstanding the borrower's strong liquidity position and access to capital markets. Material structural credit weaknesses and the uncertainty regarding management's ability to successfully implement its global business plan were sufficient reasons to support the special mention classification. As noted in the “Rating Credit Risk” booklet of the Comptroller's Handbook, there can be nonfinancial reasons for rating a credit exposure special mention, including management problems, pending litigation, an ineffective loan agreement or other material structural weakness, and any other significant deviation from prudent lending practices.

The appeals panel concluded that the credit structure is weak. The credit agreements have no financial maintenance covenants and no excess cash flow recapture provisions. The credit agreements also lack provisions to restrict payments and distributions, and the company has an unlimited ability to raise unsecured debt. The ability to incur additional secured debt and unlimited unsecured debt, in conjunction with the lack of financial covenants and the significant cash burn, could allow the company's financial risk profile to increase rapidly.

The appeals panel determined that execution risk is high and that management's ability to successfully implement its business plan is uncertain. Operating history is limited, and the company has already changed its original plans by discontinuing operations in certain markets based on regulatory and competitive factors. The appeals panel acknowledged that willingness to exit unprofitable markets can be viewed as a credit positive; however, it can also demonstrate a potential weakness related to business strategy. The uncertainty is further compounded by the lack of transparency in financial reporting.