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Appeal of Shared National Credit (Third Quarter 2017)


A participant bank appealed the special mention rating assigned to a revolving credit and a term loan, agented by a national bank during the third-quarter 2017 Shared National Credit (SNC) examination.


While the appeal acknowledged the weak, uncertain, and potentially deteriorating economic conditions in the borrower’s market, the appeal asserted that the facilities should be rated pass because of the borrower’s demonstrated track record of operating in recessionary conditions. The appeal notes that borrower’s financial performance over the previous two years has shown increases in revenues, positive cash flow, and earnings before interest, taxes, depreciation, and amortization (EBITDA) levels sufficient to support debt service requirements.

The appeal states that the borrower’s management had been successful in growing revenues and improving profitability during the most recent recessionary period. The appeal acknowledges that the borrower’s sales are a function of local market demand, but the borrower has the flexibility to adjust operating variables such as head count and inventory.

The appeal notes the company is in compliance with financial covenants and expects to maintain stable operating trends following the recent acquisition of the new business segment directed at more affluent customers. The appeal also notes that margined collateral fully supports the revolving and term loan balances.


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

The appeals panel determined that the borrower’s financial performance was deteriorating and the change in financial performance has increased refinance risk. The panel observed that revenues and EBITDA were materially lower for the trailing twelve-month period compared to the most recent fiscal year-end, with revenue and EBITDA declining 18 percent and 15 percent, respectively.

The appeals panel concluded that the borrower’s financial performance is closely linked to changes in local economic conditions, which are currently weak with a negative outlook forecast. The collateral pledged includes consumer account receivables derived through the sale of inventory, and sales demand and the collectability of the receivables are also closely linked to local economic conditions.