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Appeal of Shared National Credit (First Quarter 2017)


A participant bank appealed the substandard rating assigned to a senior secured asset-based revolving credit facility during the first-quarter 2017 Shared (SNC) examination.


The borrower is a special purpose entity (SPE) whose assets are legally isolated from the related servicer. The SPE was established to finance assets originated by an affiliate on a non-recourse basis using a revolving securitization structure.

The appeal asserted that a pass rating was appropriate due to the bankruptcy remote nature of the facility, strong collections and asset performance of the back-up servicer, protection available to the class A lenders in the form of overcollateralization of the underlying assets, and favorable comparison to the BBB-rated public term securitization.


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

The appeals panel agreed that repayment is dependent on the performance of the underlying assets, and while bankruptcy remote status does isolate the assets in a potential bankruptcy, the structure does not enhance the quality of the underlying assets. Additionally, the existence of a back-up servicer provides for continued collections in a potential bankruptcy, but does not enhance the quality of the underlying assets.

The appeals panel concluded that the substandard rating is warranted due to the over-advance resulting from unauthorized grace period extensions, prohibition of new advances under the revolver facility, and the execution of a forbearance agreement. In 2016, the agent bank notified the lender group that the company was inappropriately granting grace periods to customers that had not paid for 32 days or more, thereby overstating the amount of eligible receivables. While the company stopped the inappropriate “aging” practice, the company disclosed a decrease in excess availability on the revolver and an increase in nonperforming loans and loan-loss provisions. Subsequently, the bank group notified the borrower that the inappropriate aging practice had caused an event of default. The bank group ceased advances, terminated the revolving period, and required an aggressive amortization of the loan. In addition, the inability to draw on the revolver caused the company to cease making new loans and reduce its workforce by 50 percent. The bank group negotiated a forbearance agreement allowing the company to fund operations with excess cash flow from collections. The company’s cash flow projections reflect low liquidity at the expiration of the forbearance agreement, requiring an equity injection to resume origination operations.

The appeals panel agreed that initial collection efforts have aggressively amortized the outstanding loan balance, reduced the advance rate, and maintained a stable overcollateralization rate. There is increasing risk to the quality of the remaining assets, however, as the asset pool continues to liquidate, higher-quality assets are generally collected first, followed by lower-quality assets.