Appeal of Shared National Credit (First Quarter 2017)
A participant bank appealed the troubled debt restructure (TDR) designation assigned to a senior secured reserve-based revolving credit facility and a term loan during the first-quarter 2017 Shared National Credit (SNC) examination.
The appeal disagreed with the TDR designation, contending that the credit enhancements received for the modification adequately compensated the lenders for the concessions. The credit enhancements included commitment reductions, additional collateral, term loan amortization, price increases, and conversion of debt to equity.
An interagency appeals panel of three senior credit examiners concurred with the SNC examination team’s originally assigned TDR designation.
The appeals panel concluded that the TDR requirements of financial difficulty and the granting of a borrower concession were evident. The company incurred an interest payment default on other indebtedness and voluntarily filed for bankruptcy, demonstrating financial difficulty. Concessions were granted through the execution of the restructuring support agreement that waived certain default conditions. The appeals panel determined that the credit enhancements did not compensate the lenders for the concessions. The credit enhancements were not obtained until months after the concession was granted and were part of the borrower’s bankruptcy negotiations that occurred subsequent to the SNC examination. In addition, the principal payments made after the company declared bankruptcy were funded with previous draws on the revolver.