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Appeal of Shared National Credit (Third Quarter 2018)


An agent bank appealed the substandard rating assigned to a term credit reviewed during the third quarter 2018 Shared National Credit (SNC) examination.


The appeal contended that the borrower’s strong market position, increased customer growth, and acceptable repayment capacity warranted a regulatory special mention rating. The appeal asserted that examiners failed to consider potential asset sales proceeds totaling 6 percent of total debt for deleveraging, which would have resulted in a calculation of ability to repay 52 percent of total debt in seven years. The appeal generally agreed with the weak historic operating performance and acknowledged some uncertainty in the outcome of borrower actions to address the operating weaknesses.


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

The appeals panel determined that the rating of substandard is warranted based on well-defined weaknesses that included weak performance to the plan and insufficient repayment capacity. Strong competition negatively affected operating results, which are materially lagging behind the original forecast. Recently lowered third-party financial forecasts indicate an insufficient repayment capacity of 45 percent of total debt in seven years.

The appeals panel acknowledged the potential impact of key assumptions on expected repayment capacity. However, given the absence of borrower-provided guidance or financial forecast, the appeals panel concluded that the examiner analysis was well supported.