Appeal of Shared National Credit (First Quarter 2024)

Background

A participant bank appealed the substandard rating assigned to a revolving credit during the first quarter 2024 Shared National Credit (SNC) examination.

Discussion

The bank asserted that a pass rating was more appropriate based on the borrower’s strong repayment capacity, outperformance to plan, strong liquidity, moderate leverage, and adequate fixed charge coverage.

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 borrower’s weak primary source of repayment, weak performance to plan, and high leverage. Delayed recognition of cost synergies, elevated capital expenditures, and higher market interest rates resulted in reduced and insufficient repayment capacity. Although revenue and adjusted earnings before interest, tax, depreciation, and amortization expense (EBITDA) generally aligned with original projections, free cash flow was significantly below projections in the prior fiscal year and is tracking to be significantly below current fiscal year’s projections. Leverage is high and has increased over the past year due to a higher debt load. The appeals panel determined that the bank did not update and appropriately sensitize the repayment capacity and fixed charge coverage metrics cited in the appeal. Satisfactory liquidity does not offset the identified well-defined weaknesses.