Appeal of Shared National Credit (Third Quarter 2024)

Background

The agent bank appealed the substandard rating assigned to a revolving credit and term loan during the third quarter 2024 Shared National Credit (SNC) examination.

Discussion

The appeal asserted a special mention rating was more appropriate based on improved free cash flow during the last six months. The appeal contends the company experienced a cyclical recovery from the low point of the prior fiscal year, and financial metrics based on the last 12 months continue to reflect the cyclical downturn despite the company’s strong recovery. The appeal notes sequential quarterly growth in revenue and cash flow resulting in positive fixed charge coverage for the most recent quarter-end.

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 the well-defined weaknesses in the primary source of repayment and performance to plan that resulted in insufficient operating cash flow to cover fixed charges. Consecutive fiscal years of negative free cash flow demonstrated other than temporary weakness in the primary source of repayment. Performance to plan was also materially lower than expected, creating uncertainty regarding revised projections. While there was sequential quarterly improvement in revenue and operating cash flow over the last 12 months, there had not been a sufficient period of sustained positive fixed charge coverage to demonstrate resolution of the well-defined weaknesses.