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Appeal of Shared National Credit (Third Quarter 2024)

Background

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

Discussion

The appeal asserted that a substandard rating was not appropriate due to improved performance and recent acquisition and divestiture activity. The appeal contended that although the company experienced performance decline in the prior year impacted by commodity price volatility, current year financial results demonstrated improved fixed charge coverage with moderate leverage net of cash balances. The appeal also emphasized that a recent acquisition and an announced asset sale were expected to improve credit fundamentals.

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 well-defined weaknesses in the primary source of repayment and performance to plan that resulted in insufficient operating cash flow to cover fixed charges. Operating cash flow was weak given year-over-year declines in revenue caused by weaker market fundamentals as well as higher production costs. While financial performance has improved, the company has not achieved satisfactory and sustained performance to warrant an upgrade from the substandard rating. Free cash flow year-to-date was negative, and leverage was high. The company’s revised operating plan projected negative free cash flow for the current fiscal year. At the time of the review, the company had not exhibited financial benefits from the acquisition and had not yet completed its asset divestiture.