Appeal of Shared National Credit (Third 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 January 2017 SNC examination. The bank appealed the troubled debt restructuring (TDR) designation assigned to a credit facility in the oil and gas industry.
The appeal asserted that the short-term limited waivers and the non-conforming borrowing base were temporary accommodations provided to the borrower and did not rise to the level of a modification. The appeal stated that the commitment reduction, additional collateral, and improved credit terms were adequate compensation for the flexibility the secured creditors provided to the borrower. The secured creditors expected to be repaid in full and did not modify terms or grant a concession in accordance with the Financial Accounting Standards Board (FASB) guidance.
The appeal contended that if the credit is designated as a TDR, generally accepted accounting principles require accrual facilities to be removed from the statistical loan loss reserve pool and require an impairment analysis that results in a zero allowance for the facility because the collateral is sufficient.
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 below:
- The Glossary entry "Troubled Debt Restructurings" in the Instructions for Preparation of the Consolidated Reports of Condition and Income (Call Report) defines a TDR as a restructuring in which an institution for economic or legal reasons related to a borrower's financial difficulties grants a concession to the borrower that it would not otherwise consider.
- FASB Accounting Standards Codification (ASC) 310-40, "Troubled Debt Restructurings by Creditors," states a concession is granted by the creditor in an attempt to protect as much of its investment as possible. A creditor may restructure the terms of a debt to alleviate the burden of the debtor's near-term cash requirements, and many troubled debt restructurings involve modifying terms to reduce or defer cash payments required of the debtor in the near future to help the debtor attempt to improve its financial condition and eventually be able to pay the creditor.
- OCC Bank Accounting Advisory Series (August 2016).
The Ombudsman agreed with the TDR designation assigned by the supervisory office (SO). The borrower was experiencing financial difficulty as the company had defaulted on an interest payment on a debt obligation, received limited waivers for the payment default, entered into a forbearance agreement, and ultimately filed for bankruptcy. The secured lenders granted a concession by allowing the borrower to operate under a non-conforming borrowing base to provide liquidity and allow the company time to negotiate with the unsecured lenders. The concessions were granted to protect the secured lenders' interest. In this case, the waivers, forbearance agreements, and temporary non-conforming borrowing base were granted to free up cash in the near term and provide time for the company to negotiate a restructure with the unsecured creditors.
The Ombudsman also determined that the credit enhancements did not adequately compensate the secured lenders for the concession granted. ASC 310-40-15-7 states that in whatever form a concession is granted by the creditor to the debtor in a troubled debt restructuring, the creditor's objective is to make the best of a difficult situation. That is, the creditor expects to obtain more cash or other value from the debtor, or to increase the probability of receipt, by granting the concession than by not granting it. By granting the concession, the secured lenders improved their position through credit enhancements.
The Ombudsman determined that while the facility's accrual status and impact on the loan loss reserve are outside the scope of the appeal, the facility was designated as nonaccrual as of the SNC review period. The post-bankruptcy facility may not have to be reported as a TDR if the restructured loan no longer meets the TDR criteria; the borrower is no longer experiencing financial difficulty; and the loan is on market terms. The Glossary entry for "Troubled Debt Restructurings" in the Call Report Instructions and question 46 under the "Troubled Debt Restructurings" section of the OCC Bank Accounting Advisory Series provide guidance on the accounting for the subsequent restructuring of a TDR.