Skip to main content
OCC Flag

An official website of the United States government

Appeal of Shared National Credit (Second Quarter 2017)


A participant bank supervised by the Office of the Comptroller of the Currency (OCC) appealed to the OCC's Ombudsman the decision rendered by the interagency Shared National Credit (SNC) appeals panel during the August 2016 SNC examination. The bank appealed the substandard ratings assigned to credit facilities extended to affiliated companies in the oil and gas industry. As the obligors' revenue streams were interrelated, they were assigned the same risk ratings based on the consolidated financial statements and condition of the parent corporation.


In its appeal, the bank acknowledged that the borrower had experienced a deterioration in performance due to a decline in oil prices; however, the appeal asserted that the credit profile of the borrower does not fit within the regulatory definition of a substandard credit. The appeal asserted that a special mention classification was appropriate to reflect the current cyclical challenges that may impact repayment prospects. The appeal argued that the credit weakness at this time does not jeopardize repayment or present a distinct possibility of a risk of loss if not corrected.

To support the bank's assertion that the credit facilities do not meet the definition of substandard, the appeal described that the borrower has financial flexibility, access to capital markets, and good capitalization and enterprise value. The appeal stated that the company's projected leverage metrics are not indicative of a substandard credit and that the substandard rating overstates the probability of default.


The Ombudsman conducted a comprehensive review of the information submitted by the bank and the SNC appeals panel, and relied on the supervisory standards outlined in the "Rating Credit Risk" and "Oil and Gas Exploration and Production Lending" booklets of the Comptroller's Handbook; OCC Bulletin 2013-9, "Interagency Guidance on Leveraged Lending" (Leveraged Lending Guidance); and OCC Bulletin 2014-55, "Frequently Asked Questions for Implementing March 2013 Interagency Guidance on Leveraged Lending" (Leveraged Lending FAQs).

As provided in the "Rating Credit Risk" booklet, the regulatory definition of a substandard asset is an asset inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Special mention assets are defined as having potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution's credit position at some future date. Special mention borrowers may be experiencing adverse operating trends (e.g., declining revenues or margins) or adverse economic or market conditions.

The Ombudsman determined that, although the borrower's credit metrics have weakened due to the decline in oil and gas commodity prices, the borrower exhibits satisfactory liquidity and repayment capacity, which provides adequate protection of the assets at this time. The Ombudsman concurred with the bank that the appropriate risk rating for the credit facilities is special mention. The obligor's operating losses and decline in cash flow, combined with adverse market conditions in the oil and gas industry, pose potential weaknesses that, if left uncorrected, may result in deterioration of the repayment prospects for the assets at some future date.

The "Rating Credit Risk" booklet further states that substandard assets have a high probability of payment default, or they have other well-defined weaknesses. The Ombudsman determined that the substandard rating overstates the probability of default. Projections reflect that the borrower's balance sheet cash combined with EBITDAX (earnings before interest, taxes, depreciation, and amortization (EBITDA), plus depletion, exploration, and abandonment expenses) are adequate to cover estimated fixed charges through the seven-year projection period without use of the revolving credit facilities.

In applying the standards in the Leveraged Lending Guidance and the Leveraged Lending FAQs, the Ombudsman determined the company exhibits adequate projected de-levering ability based on consideration of other compensating means of financial support described in question 18 of the Leveraged Lending FAQs, including the company's high cash liquidity position, ability to curtail common stock dividends if necessary, and proven ability to reduce capital expenditures. Adjustments to projections for common stock dividends and capital expenditures, based on company guidance, reflect that the borrower has ability to de-lever at least 50 percent of total debt over five to seven years, in accordance with the Leveraged Lending Guidance, with projected unrestricted cash.

The Ombudsman also considered the company's overall reasonable leverage and capitalization positions, as well as its access to debt and equity capital markets at reasonable terms, as other factors supporting a special mention rating.