Appeal of Shared National Credit (Third Quarter 2022)

Background

The agent bank appealed the substandard rating assigned to a revolving and term credit during the third quarter Shared National Credit (SNC) examination.

Discussion

The appeal asserted a special mention rating is more appropriate due to the obligor’s worth, repayment capacity, and probability of default. Projections reflect the ability to continue to generate revenue growth and operating profitability in line with recent performance due to strong customer retention, consistently high margins, and compounded annual growth rates. Per the agent bank’s projections, performance will result in seven-year repayment capacity above 50 percent beginning in 2023.

Supervisory Standards

An interagency appeals panel conducted a comprehensive review of the information submitted by the bank and relied on the supervisory standards outlined below:

Comptroller’s Handbook, “Commercial Loans” (Narrative—March 1990, Procedures—March 1998)
Comptroller’s Handbook, “Leveraged Lending” (February 2008)
Comptroller’s Handbook, “Rating Credit Risk” (April 2001, updated June 2017 for nonaccrual status)
OCC Bulletin 2013-9, “Leveraged Lending: Guidance on Leveraged Lending”

Conclusion

An interagency appeals panel of three senior credit examiners concurred with the SNC examination team’s originally assigned rating of substandard based on well-defined weaknesses, including inadequate repayment capacity and high leverage. Projections do not support adequate repayment of debt over a reasonable time period with cumulative free cash flow available to repay less than 50 percent of outstanding debt over seven years. The panel determined it is not appropriate to exclude 2022 actual and projected financial performance in assessing the company’s ability to reduce total debt. Leverage (total outstanding debt divided by adjusted earnings before interest, taxes, depreciation, and amortization) as of the trailing 12 months ending March 31, 2022, is high at over eight times.