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Appeal of Shared National Credit (Third Quarter 2024)

Background

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

Discussion

The appeal asserted a special mention rating was more appropriate based upon a cyclical downturn in the industry and a one-time operational matter that occurred in the prior year, with financial results reflecting a recovery from the low point and the company resolving the operational matter. The appeal contended that both these circumstances were temporary in nature and represented a potential weakness. The appeal further contended that the weak primary source of repayment referenced to support the rating did not incorporate the company’s much improved financial and operating profiles.

Supervisory Standards

An interagency appeals panel conducted a comprehensive review of the appeal 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 2013-9, “Leveraged Lending: Guidance on Leveraged Lending”

Conclusion

An interagency appeals panel concurred with the SNC examination team’s originally assigned substandard rating based on the well-defined weaknesses in the primary source of repayment and performance to plan that resulted in insufficient operating cash flow to cover fixed charges. Operating cash flow was weak given year-over-year declines in revenue caused by weaker market fundamentals as well as higher production costs. While financial performance improved, the company had not achieved satisfactory and sustained performance to warrant an upgrade from the substandard rating. Free cash flow year-to-date was negative and leverage was high. The company’s revised operating plan projected negative free cash flow for the current fiscal year.