Appeal of Shared National Credit (Third Quarter 2018)

Background

A participant bank appealed the special mention rating assigned to a revolving credit agented by a national bank and reviewed during the third quarter 2018 Shared National Credit (SNC) examination.  

Discussion

The appeal agreed with the examiners regarding the obligor’s material off-plan performance and high leverage (debt to earnings before interest, taxes, depreciation, and amortization (EBITDA)), but contended that more recent performance against revised projections and total debt compared with the current enterprise valuation were mitigating factors warranting a pass rating.

Conclusion

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

The appeals panel agreed with the examiners that revenues and EBITDA were notably below original underwriting expectations, which resulted in free cash flow generation 74 percent below original estimates. The appeals panel acknowledged that recent financial performance was favorable when compared with the revised estimates; however, there was insufficient evidence to support sustainability.

Funded leverage (funded debt divided by adjusted EBITDA) remained high and almost twice the level anticipated in the original projections. The appeals panel acknowledged actions taken by the borrower to reduce debt through the sale of noncore assets, and agreed that repayment capacity estimates provide some support, if realized.