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

Background

A participant bank appealed the special mention ratings assigned to a term loan and revolving credit during the February 2016 SNC examination.

Discussion

The appeal asserted that both credit facilities should be rated pass. The appeal acknowledged that foreign exchange (FX) fluctuations had negatively impacted recent performance but asserted that the borrower’s strong margins, low capital expenditure requirements, and recurring revenue base provide a good foundation for stable free cash flow generation. The appeal further asserted that projections reflect ability to repay 100 percent of senior secured debt and more than 50 percent of total debt over seven years.

Conclusion

The 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 determined that potential credit weaknesses supporting the special mention rating include uncertainty regarding the company’s projections and ability to meet revenue and earnings growth targets required to demonstrate de-leveraging capacity over a reasonable time frame. The company delayed implementation of its margin improvement plan, and the revised 2016 projections reflect a reduction in earnings and higher near-term capital expenditures. The appeals panel concluded that the company’s de-leveraging ability remains at risk of further plan revisions, underperformance to plan, and FX volatility, which reflect potential credit weaknesses. The company’s decision not to implement a formal FX hedge program presents an additional and ongoing risk to the company’s ability to meet projections.