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Appeal of Shared National Credit (First Quarter 2017)


A participant bank appealed the special mention rating assigned to a senior secured revolving credit facility during the first-quarter 2017 Shared National Credit (SNC) examination.


The appeal asserted that the credit should be rated pass. The appeal argued that the borrower’s performance history does not indicate deterioration of leverage or coverage metrics, the increase in first lien credit facilities has been limited despite acquisition activity, and the borrower has the capacity to repay 100 percent of senior debt and 50 percent of total debt within seven years. Refer to OCC Bulletin 2013-9, “Guidance on Leveraged Lending.” The appeal asserted that the revolver contains a springing leverage covenant, which enhances the facility’s structure, and the enterprise value provides substantial cushion, even in a downside scenario.


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 a special mention rating is appropriate due to the borrower’s continued high ratio of debt to earnings before interest, taxes, depreciation, and amortization (EBITDA), which may result in the borrower’s inability to de-lever to a sustainable level over a reasonable period. Over the past three years, the borrower’s debt-to-EBITDA position decreased nominally and did not meet projections due to the incurrence of additional debt.

In addition, the appeals panel concluded that the no-growth assumption in the bank’s debt repayment analysis is flawed. EBITDA is over-stated because the bank included certain add-backs that would not occur in a no-growth scenario and the bank’s capacity to repay calculation omitted the required cash dividend to the borrower’s holding company that should be included in the borrower’s fixed charges. The borrower’s capacity to repay senior secured and total committed debt over seven years decreases to 51 percent and 32 percent, respectively, if the cash available to repay debt is calculated using EBITDA without the add-backs and the divided included in fixed charges.

Regarding the springing leverage covenant, while the trigger is reasonable, the maximum first lien debt-to-EBITDA ratio allows an excessive cushion.