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Appeal of Shared National Credit (SNC) – Loss Classification – (Third Quarter 2010)


A large national bank appealed the decision rendered by the SNC appeal voting team to classify a revolving credit facility (the facility) as loss. The bank disagreed with the loss classification because the underlying borrowers had not formally suspended debt repayments or otherwise ceased normal business operations. The appeal further stated that the credit impairment was not permanent and was more reflective of the economic downturn in the lodging sector. Based on pending negotiations with the borrower and the reversing trend in the lodging industry, the appeal requested deferral of the loss designation.


The ombudsman conducted a comprehensive review of the documentation supplied by the bank and the SNC appeal voting team. The ombudsman relied upon the definition of loss as defined in the Comptroller's Handbook for Rating Credit Risk (the Handbook) as the standard for the analysis.

The Handbook defines an asset as "loss" if it is deemed uncollectible and of such little value that its continuance as a bankable asset is not warranted. It does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the asset.


The ombudsman determined there was material deterioration in the company's operating performance and cash flows that jeopardized repayment of the debt. The facility had been fully drawn since 2008 and the amount of time required to amortize the debt was uncertain. However, at the time of the SNC review, the company was current on its debts and in compliance with all covenants. Additionally, negotiations were underway to restructure the facility, including the addition of hard collateral, which could mitigate the risk of loss.

An asset classified "doubtful" has all the weaknesses inherent in a substandard asset with the added characteristic that the weaknesses make collection or liquidation in full, based on currently existing facts, highly questionable and improbable. Although there is a high probability of loss, specific pending events may strengthen the asset causing its classification as loss to be deferred.

As such, the ombudsman opined that the appropriate rating for the facility was doubtful, pending the outcome of negotiations. The credit should also be placed on nonaccrual. The ombudsman's conclusion was based on the specific facts and circumstances of this appeal and was not intended to be a broad conclusion regarding all cases involving the lodging sector.