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Appeal of Shared National Credit (First Quarter 2023)

Background

A participant bank appealed the pass rating assigned to a revolving credit during the first quarter Shared National Credit (SNC) examination.

Discussion

The appeal asserted a substandard rating is more appropriate based on elevated leverage, marginal primary repayment capacity, and heightened business execution risks associated with the company’s reorganization and refocused business model.

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)

Conclusion

An interagency appeals panel of three senior credit examiners concurred with the SNC examination team’s assigned rating of pass based on the borrower’s satisfactory primary source of repayment and liquidity and moderate leverage. The panel acknowledged year-over-year decline in revenue and adjusted earnings before interest, taxes, depreciation, and amortization due to asset sales and capital expenditures associated with the refocused business model. However, the panel concluded the fixed charge coverage ratio was adequate for the trailing 12 months and projected seven-year total debt repayment capacity is satisfactory. The panel gave greater consideration to the agent bank’s projections, which more accurately reflect planned asset sales, than the appealing bank’s projections. Liquidity remains satisfactory with adequate cash and additional revolver availability.