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


A participant bank appealed the special mention rating assigned to an asset-based loan (ABL) during the August 2016 SNC examination.


The appeal asserted that the restructuring of the company's debt to a fully secured ABL, along with other events, supports a pass rating. The appeal argued that the OCC's liquidity standards for evaluating ABLs to borrowers exhibiting anticipated negative cash flows were not appropriately applied, because the borrower's liquidity coverage of cash burn exceeds the threshold coverage of 24 to 30 months described in the "Asset-Based Lending" booklet of the Comptroller's Handbook.


An interagency appeals panel of three senior credit examiners concurred with the SNC examination team's originally assigned risk rating of special mention.

The appeals panel concluded that the special mention rating is warranted due to the borrower's continued weak financial performance, negative cash flow, and high leverage. While the deterioration in financial performance has slowed for the past two quarters, additional time is needed to determine whether operations have sufficiently stabilized. The appeals panel acknowledged that liquidity is satisfactory but noted that a majority of the liquidity comes from the borrowing base availability that fluctuates with changes in commodity prices. Excess global capacity and reduced demand for the company's product has caused significant price swings, which have negatively impacted revenue, liquidity, and collateral value.

The appeals panel determined that commodity price risk has contributed to an increase in cash burn, decrease in liquidity, and negative cash flow that caused a material decline in cash balances. The risk rating standards described in the "Asset-Based Lending" booklet of the Comptroller's Handbook support the special mention rating in consideration of these declining financial trends. Liquidity coverage of the cash burn is one rating criteria, and the appeals panel concluded that the company's liquidity position mitigates a classified rating. However, the other credit weaknesses described above support a special mention rating.