Appeal of Shared National Credit (SNC)-(Fourth Quarter 2016)

Background

An agent bank appealed the special mention ratings assigned to a term loan and revolving credit during the August 2016 SNC examination.

Discussion

The appeal asserted that the facilities should be rated pass because performance has been stable, with year-to-date second-quarter 2016 adjusted revenues remaining flat; adjusted earnings before interest, taxes, depreciation, and amortization slightly exceeding the prior year; and total leverage remaining stable. The appeal argued that the company maintains a significant cash balance and that enterprise value covers total debt. The appeal acknowledged the risks associated with investigations, litigation, and internal control issues but asserted that the company exhibits financial strength that would offset potential weaknesses.

Conclusion

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

The appeals panel determined that the special mention risk rating is warranted based on the potential weaknesses identified regarding ongoing investigations, litigation, internal controls related to financial reporting, and deterioration in financial performance. The resulting impact from the expense of the investigations and litigation on the company’s financial performance is unknown. Company projections were revised downward in third quarter 2016 due to the expected costs associated with these issues. The appeals panel concluded that the unknown future financial impact of the investigations and litigation, coupled with high leverage and marginal fixed charge coverage, reflect potential weaknesses that may result in deterioration of repayment prospects.