Appeal of Shared National Credit (Third Quarter 2019)
An agent bank appealed the substandard risk rating assigned to a revolving credit and a term loan reviewed during the third quarter 2019 Shared National Credit (SNC) examination.
The appeal asserted that a special mention rating is more appropriate. The appeal contended that the obligor's financial and operational attributes evidence potential weaknesses that deserve management's close attention and align with the special mention rating definition.
The appeal disagreed with the support for the substandard rating of weak performance to the plan, weak repayment capacity, and high leverage. The appeal noted that the obligor's financial attributes include a fixed charge coverage (FCC) ratio exceeding 1.4X, repayment capacity of 44 percent of total outstanding debt within seven years, and sufficient liquidity. The appeal asserted that the FCC ratio demonstrated the obligor's ability to support current debt load despite declining earnings before interest, taxes, depreciation, and amortization (EBITDA) and is a result of the obligor proactively reducing interest requirements by prepaying higher-rated senior notes. The appeal argued that operational attributes supporting a special mention rating were recent performance improvement and actions taken to improve profitability and reduce leverage.
The interagency appeals panel conducted a comprehensive review of the information submitted by the bank, and relied on the supervisory standards outlined below:
- OCC Bulletin 2013-9, "Guidance on Leveraged Lending"
- OCC Bulletin 2014-55, "Frequently Asked Questions for Implementing March 2013 Interagency Guidance on Leveraged Lending"
- 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)
An interagency appeals panel of three senior credit examiners concurred with the SNC examination team's originally assigned rating of substandard due to well-defined weaknesses evidenced by weak repayment capacity, high leverage, and weak performance to the plan.
The appeals panel determined that the obligor's financial projections reflect an inability to repay debt within a reasonable period of time. The appeals panel determined that the FCC ratio was a result of the lack of meaningful repayment requirements on existing debt rather than underlying strength in the borrower's financial performance. The appeals panel also acknowledged the borrower's actions to improve its financial performance but noted the need for a sustained period of improved performance to conclude that the actions addressed the financial concerns contributing to the substandard rating.