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Appeal of Shared National Credit (First Quarter 2017)


An agent bank appealed the designation of non-pass assigned to a leveraged loan at origination during the first-quarter 2017 Shared National Credit (SNC) examination.


The appeal asserted that the credit was appropriately risk rated as pass based on information available at the time of underwriting. The company’s operating performance through underwriting and closing were positive, and pro-forma leverage and repayment capacity supported a pass rating. The appeal asserted that updated financial results made available through the loan closing five months later did not reflect potential weaknesses warranting a downgrade to non-pass. Refer to OCC Bulletin 2014-55, “Frequently Asked Questions for Implementing March 2013 Interagency Guidance on Leveraged Lending.” The appeal argued that the deterioration became apparent 12 months after the close date.


An interagency appeals panel of three senior credit examiners concurred with the bank’s appeal that a pass rating at the time of origination was appropriate due to favorable operating performance and the ability to repay debt over a reasonable period of time.

The challenging and competitive industry resulted in a modest underperformance to plan for the three quarters after closing. Credit deterioration became fully apparent in the financial results for the fourth quarter after closing, which reflected a slowdown in revenues and earnings before interest, taxes, depreciation, and amortization, and a sponsor dividend. Revised financial projections provided 12 months after closing reflected the borrower’s inability to repay at least 50 percent of total debt within seven years. Inadequate repayment capacity and high and increasing leverage support the current risk rating of substandard, which the bank does not dispute.

If a loan is downgraded to a non-pass rating within a short time (typically six months) after the inception date, an institution should evaluate the risk-rating documentation and decision-making processes both at inception and at the time of rating downgrade. The institution’s loan review function should then assess within six months of origination whether the factors that caused the rating change existed at inception, or if the factors were the result of subsequent deterioration in the borrower’s financial condition and repayment capacity. Examiners consider this review when evaluating the institution’s efforts to originate loans in a safe and sound manner.