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Appeal of Shared National Credit (SNC) (Third Quarter 2015)


An agent bank appealed the split ratings of substandard/doubtful/loss assigned to a revolving credit during the 2015 Shared National Credit (SNC) examination.


The appeal asserted that the facility should be rated 100 percent substandard and receive nonaccrual treatment. The appeal disagreed with the 32 percent doubtful and 13 percent loss ratings primarily based on collateral coverage. The appeal suggested the use of a moderate advance rate for proved undeveloped (PUD) reserves, and different advance rates for proved developed non-performing (PDNP) reserves depending on whether the well is shut-in, behind pipe, or simply in the process of being drilled.

The appeal indicated that the facility was adequately covered by the collateral value, although events could occur that may cause a reevaluation. A downgrade to doubtful or loss for a portion of the facility could be appropriate at a later date.


An interagency panel of three senior credit examiners adjusted the ratings to 87.5 percent substandard and 12.5 percent doubtful with nonaccrual treatment. The appeals panel concluded that the original SNC voting team did not diverge from the credit risk rating guidance contained on pages 25 and 26 of the “Oil and Gas Exploration and Production Lending” booklet of the Comptroller’s Handbook, dated March 2016, which each agency has generally adopted for use by its examiners. The SNC voting team applied the loan’s collateral values to the classification amounts in a manner fully consistent with that guidance. While the guidance does allow consideration of PDNP and PUD values in determining bankable classification amounts, the voting team decided in this case not to include such values in the risk rating decision based on an analysis of that part of the collateral pool. The booklet provides examiners judgmental discretion if supported by appropriate documentation.

During the SNC appeals process, and only for purposes of the 2015 SNC examination, the interagency SNC management group, working in coordination with regulatory agencies’ credit policy groups, agreed to make the following adjustments to the booklet’s risk rating criteria for loans where repayment is entirely dependent on the value of or cash flow generated by the collateral.

Proved developed performing (PDP) reserves 100%—Substandard
Hedges 100%—Substandard
PDNP reserves 70%—Substandard
PDNP reserves 30%—Doubtful
PUD 50%—Doubtful

The interagency decision to apply the revised risk rating criteria to reserve-based loans reflects the agencies’ understanding that engineering valuation techniques and reliability have significantly improved over the past 30 years (since the existing examiner risk rating guidance was developed) due to advancements in industry technology and market efficiency. In addition, the risk adjustments to the various reserve value categories are consistent with industry practice.

SNC examiners used information available at the time of the review. New information, such as the projections provided in the appeal letter and the bankruptcy filing, represented events that occurred after the SNC examination and not considered in the appeal decision. Regardless, these additional events do not alter the principal assessment that the borrower did not generate sufficient cash flow to fully cover its interest and principal along with capital expenditures.