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Appeal of Shared National Credit (SNC)-(Second Quarter 2016)


A participant bank appealed the substandard rating assigned to a revolving credit during the February 2016 SNC examination.


The appeal asserted that the revolving reserve-based loan (RBL) should be rated special mention. The appeal acknowledged that cash flow shortfalls are projected but asserted that current cash and RBL availability are sufficient to cover the projected shortfall. The appeal also asserted that there has been a significant reduction in total debt over the last two years.


The interagency appeals panel of three senior credit examiners concurred with the SNC examination team’s originally assigned risk rating of substandard.

The appeals panel determined that the substandard rating is warranted due to well-defined weaknesses, including negative free cash flow, declining operating performance, increasing leverage, and projected liquidity constraints. The appeals panel concluded that while total debt declined, projections reflect the company’s likely inability to repay total debt within a reasonable time frame based on the economic life of the collateral. Furthermore, leverage is projected to increase due to declining earnings. The increased leverage is projected to result in a covenant breach, which would reduce liquidity by constraining availability under the RBL.