Appeal of Shared National Credit (First Quarter 2019)
An agent bank appealed the doubtful rating assigned to an unsecured revolving credit reviewed during the first quarter 2019 Shared National Credit (SNC) examination.
The appeal asserted that a substandard/nonaccrual risk rating is more appropriate. The appeal acknowledged the overall high leverage, weak primary sources of repayment, and weak liquidity, but contended that the examiners failed to consider the benefit derived from the upstream guarantees provided by operating subsidiaries, that would result in full recovery of all facilities. The appeal noted that the structure of the upstream guarantees elevate the priority of the facility ahead of other pari-passu unsecured debt, and given the enterprise value, collection or liquidation in full was not highly questionable or improbable.
The appeals panel conducted a comprehensive review of the information submitted by the bank, and relied on the supervisory standards outlined below:
- OCC Bulletin 2013-9, "Guidance on Leveraged Lending"
- OCC Bulletin 2014-55, "Frequently Asked Questions for Implementing March 2013 Interagency Guidance on Leveraged Lending"
- 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)
An interagency appeals panel of three senior credit examiners concurred with the SNC examination team’s originally assigned rating of doubtful due to uncertainty in collection in full.
The appeals panel determined that the obligor’s enterprise value was insufficient to fully cover secured and unsecured debts, resulting in a potential loss. The doubtful rating stems from the uncertain timing and amount of the potential loss due to the unknown impact of planned and completed asset sales as well as uncertainty on whether the presence of the guarantors would enhance potential recoveries. The appeals panel was unable to substantiate the likelihood of realizing the prioritization based on the information provided.