Appeal of Shared National Credit (Third Quarter 2024)

Background

A participant bank appealed the substandard rating assigned to a revolving credit during the third quarter 2024 Shared National Credit (SNC) examination.

Discussion

The appeal asserted a special mention rating was more appropriate given sequential quarterly improvement in revenue, operating cash flow, and free cash flow. The appeal argued that previous weaknesses were no longer present.

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. Despite improving trends, the duration of positive results was insufficient to demonstrate recovery.