Appeal of Shared National Credit (First Quarter 2024)

Background

Three participant banks appealed the special mention rating assigned to a revolving credit during the first quarter 2024 Shared National Credit (SNC) examination.

Discussion

The bank asserted a pass rating was more appropriate based on satisfactory fiscal year results. The appeals cited that the company’s stable revenue, leverage, and debt level were consistent with the revised plan. The appeals also contended that repayment capacity was adequate, and the company had full access to an undrawn revolving credit. While acknowledging elevated leverage, the appeals claimed adequate repayment capacity and improving cash flow mitigated this risk.

Supervisory Standards

An interagency appeals panel conducted a comprehensive review of the appeals 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 special mention rating based on the marginal primary source of repayment, weak performance to plan, and high leverage. Declining operating performance resulted in multiple updated projections forecasting marginal repayment capacity. Performance to plan was weak due to declining revenues, adjusted earnings before interest, tax, depreciation, and amortization expense (EBITDA), and margins caused by macroeconomic issues and company-specific challenges. Leverage was high, and the company had not achieved deleveraging as planned. An asset sale announced after the SNC review was not considered by the SNC examination team or the appeals panel.