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Appeal of Shared National Credit (Third Quarter 2021)


A participant bank appealed the substandard risk rating assigned to a revolving credit during the third quarter Shared National Credit (SNC) examination.


The appeal asserted that a pass rating is appropriate. The appeal acknowledged that COVID-19 impacted the borrower but pointed to evidence indicating that the borrower had recovered in 2021. In particular, the appeal contended that the borrower’s financial performance materially improved in the first half of 2021, exceeded plan projections, and resulted in positive free cash flow. The appeal also emphasized the borrower’s projected ability to repay 94 percent of total debt within seven years. Finally, the appeal noted the borrower’s proven access to capital markets and the recently upsized revolving credit facility as support for a pass rating.

Supervisory Standards

The interagency appeals panel conducted a comprehensive review of the information submitted by the bank and relied on the supervisory standards outlined below:

  • 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)
  • OCC Bulletin 2020-35, “Trouble Debt Restructuring: Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by COVID-19 (Revised)”
  • OCC Bulletin 2020-64, “Examinations: Interagency Examiner Guidance for Assessing Safety and Soundness While Considering the Effect of COVID-19 on Institutions”
  • OCC Bulletin 2020-72, “Credit Administration: Joint Statement on Additional Loan Accommodations Related to COVID-19”


An interagency appeals panel of three senior credit examiners agreed with certain aspects of the bank’s appeal request and assigned a special mention risk rating based on the borrower’s marginal primary source of repayment and high leverage. Following unprecedented declines in financial performance in 2020 due to COVID-19 related travel disruptions, the borrower showed significant improvement in 2021 and exceeded plan projections. Trailing 12-month (TTM) free cash flow turned positive on June 30, 2021, and TTM adjusted earnings before income, taxes, depreciation, and amortization (EBITDA) exceeded pre-pandemic levels. Although improvement was substantial and is expected to continue, much of that improvement was realized in the most recent quarter of review. At the time of the review, there remained significant potential for operating performance and repayment capacity to be negatively impacted by possible travel restrictions and a decline in demand due to COVID-19 resurgence.