Appeal of Shared National Credit (SNC) (Third Quarter 2015)
A participant bank appealed the special mention rating assigned to a credit facility during the 2015 Shared National Credit (SNC) examination.
The appeal asserted that the facility should be rated pass due to sufficient repayment ability and, despite recent budget misses, a long track record of consistent growth. The appeal stated that the borrower was projected to repay over 60 percent of total debt based on conservative projections and 59 percent in a flat growth case. Even when including the holding company’s debt, repayment of total debt exceeded 50 percent. The borrower’s mission critical nature of its products across a blue chip customer base, 94 percent customer retention rate, and 97 percent recurring revenue model supported free cash flow conversion exceeding 85 percent of repayment requirements.
An interagency appeals panel of three senior credit examiners concurred with the SNC examination team’s originally assigned risk rating of special mention.
The appeals panel agreed that projected repayment of total debt was greater than 50 percent over seven years, if the dividend to the holding company was excluded. The base case cash flow projection indicated repayment capacity of 55.1 percent, a slight improvement over the bank’s credit case scenario of 53.7 percent. The ratio declined to 46 percent, however, when the annual interest expense for the holding company debt was included. The appeals panel considered it appropriate to include this dividend given the past and expected continuation of payments. The company’s financial statements noted that dividend declaration and payment commenced in 2013 and were expected to continue as long as the debt required servicing. Furthermore, the bank’s credit case scenario computed the company’s ability to de-lever based on a more aggressive annual growth rate for earnings before interest, taxes, and depreciation than the company’s actual three-year average growth rate in 2011 to 2014.
The company had experienced underperformance to plan and increasing debt levels from two sponsor dividend recapitalizations in recent years. The company also missed revenue performance to plan for fiscal years 2011 to 2014. These factors had caused the leverage ratio to increase from 2013 to 2014. The bank’s leverage ratio computation at March 31, 2015, was based on “net debt.” The “Interagency Guidance on Leveraged Lending,” dated March 2013, states that cash should not be netted against debt for purposes of this calculation.