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Appeal of Shared National Credit (Third Quarter 2017)


An agent bank supervised by the Office of the Comptroller of the Currency appealed the special mention rating assigned to a revolving credit and a term loan during the third-quarter 2017 Shared National Credit (SNC) examination.


The appeal acknowledges that the borrower’s post-acquisition leverage is elevated and performance is lagging underwriting projections but asserts that the credit facilities should be rated pass because of the predictability of the protected revenues and the realization of planned integration synergies.

The appeal states that the borrower operates in a regulated industry, providing the borrower predictable margins and a protected revenue stream linked to territorial rights. The appeal contends that structural barriers in this regulated industry allow the bank to extend debt at higher debt to earnings before interest, taxes, depreciation and amortization (EBITDA) leverage multiples.

The appeal acknowledges that underwritten financial projections have not been achieved but asserts that the variance from plan was not material, and the realized cash flow, when annualized, will be sufficient to maintain covenant compliance. The appeal acknowledges that expense reductions have taken longer to realize than originally planned but asserts that expected synergies were achieved in June 2017 and that the integration risk from an operational standpoint has passed.


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

The appeals panel found a number of potential weaknesses that, if not remedied, may result in inability to repay the subject debt in full. Senior funded debt to EBITDA was more than six times and the borrower’s first- and second-quarter 2017 operating cash flows were below plan by 4 percent and 30 percent, respectively. The original underwritten financial projections that were needed to support the elevated leverage have not been achieved, and the material off-plan performance increases repayment risk.