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Appeal of Shared National Credit (First Quarter 2018)


Two participant banks appealed the substandard rating assigned to a revolving credit, agented by a national bank, during the first-quarter 2018 Shared National Credit (SNC) examination.


The appealing banks generally agreed that the borrower exhibited weak operating results, insufficient operating cash flow to meet fixed charges, and increasing leverage. The appealing banks believed, however, that the supporting collateral, borrowing base controls, and availability under the revolving credit supported a pass rating.


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

The appeals panel determined that the substandard rating was warranted based on well-defined weaknesses that were acknowledged in the appeal. While the revolving credit appeared to provide some liquidity, full access would not be permitted due to springing covenants that consider, among other things, the borrower’s inability to fund fixed charges from operating cash flow. The collateral pledged was not self-liquidating and therefore was considered a secondary source of repayment.