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A participant bank appealed the substandard risk rating assigned to a term credit facility during the third quarter Shared National Credit (SNC) examination.
The appeal asserted that a special mention rating is appropriate. The appeal contended that the trailing 12-month (TTM) revenue and earnings, before interest, taxes, depreciation, and amortization (EBITDA) were negatively (and inappropriately) skewed because of the inclusion of financial results during a period when performance was down due to COVID-19. The appeal pointed to various metrics that improved in the second quarter of 2021, including EBITDA that exceeded levels reported in the quarters before COVID-19. The appeal also contended that the borrower’s weak performance to projections was expected because of difficulty projecting the impact from COVID-19. Finally, the appeal did not dispute the high leverage but contended that it was driven by temporary weakness in cash flow.
The interagency appeals panel conducted a comprehensive review of the information submitted by the bank and relied on the supervisory standards outlined below:
An interagency appeals panel of three senior credit examiners concurred with the SNC review team’s regulatory rating of substandard based on the borrower’s weak primary source of repayment, weak performance to plan, and high leverage. Although interim financial performance improved, free cash flow was negative for the six months and TTMs ending June 30, 2021. The borrower underperformed relative to 2020 projections and revised projections downward in early 2021 to capture continued operating stress that projected negative free cash flow extending through year-end 2021.