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


An agent bank appealed the loss rating assigned to a revolving credit that was assigned split pass/substandard/doubtful/loss ratings during the February 2016 SNC examination.


The appeal disagreed with the loss amount and asserted that SNC examiners disregarded an independent third-party enterprise value analysis for the loss calculation, instead assigning loss to the portion of the loan that exceeded the unrisked net present value of proved reserves. The appeal asserted that when the entire value of an enterprise is available to satisfy first-lien creditors’ claims, including when a borrower is in bankruptcy and the plan of reorganization provides such creditors with a substantial portion of the reorganized equity, an independent enterprise value analysis is the best approximation of the value for determining loss.

The appeal also argued that the loss analysis excluded a significant portion of cash on hand and only considered the cash held in a segregated collateral account.


The interagency appeals panel of three senior credit examiners concurred with the SNC examination team’s originally assigned risk ratings for the credit, including the amount listed as loss.

The appeals panel concluded that the SNC voting team’s reserve-based collateral valuation was appropriate and supported the amount risk-rated loss. The interagency panel determined that the original SNC voting team did review and consider the independent enterprise value report, but that several concerns with the reported valuations were identified, and it was concluded that the values were not well supported. First, an engineering report was not provided in support of the reserve approach to value. Second, the unproved reserves should not have been included in the collateral pool given the level of uncertainty involved in the development of these assets. Third, the companies used as comparable transactions were not appropriate given the borrower’s severely distressed condition and bankruptcy, as none of the comparable transactions were operating in bankruptcy.

Regarding cash collateral, the appeals panel concluded that any amount disbursed to the senior secured lenders should be treated as a loan recovery, because the current circumstances provide uncertainty as to the timing of emergence from bankruptcy and as to the amount of cash that will ultimately be available to the bank group outside of the segregated cash collateral account.