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


A participant bank appealed the substandard rating and cash basis nonaccrual designation assigned to a revolving credit during the February 2016 SNC examination.


The appeal asserted that the revolving credit should be rated pass and accrual. The appeal asserted that the borrower’s credit metrics consistently demonstrated full debt service capability. The appeal acknowledged several years of poor performance but noted that the borrower remained current during that time by deferring needed capital expenditures (capex). The appeal also asserted disagreement with the collateral value.


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

The appeals panel concluded that the company has exhibited weak operating performance, high leverage, deferred maintenance, and deferred capital improvements, which are well-defined weaknesses warranting a substandard rating. The appeals panel acknowledged that interim financial data reflects signs of improving revenues based on increased occupancy and substantial net entrance fees. However, there is insufficient evidence to support a sustained improvement in performance that would generate sufficient debt service capacity to cover all fixed charges, including required capex.

The appeals panel concurred with the cash basis nonaccrual treatment due to tight collateral coverage and the property’s poor historical operating performance, which raises doubt regarding repayment of principal and interest in full. The appeals panel determined that collateral coverage is marginal based on the most recent agent bank’s “as is” appraised value. Prolonged deferred maintenance has negatively impacted occupancy and collateral value. In addition to collateral value, other credit weaknesses contributing to the nonaccrual determination included the need for the borrower to secure a construction loan senior to the subject bank debt, significant extension of the maturity date, the need to reset loan covenants, and continued outstanding deferred maintenance.