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Appeal of Shared National Credit (SNC) (Third Quarter 2015)


An agent bank appealed the special mention rating assigned to a revolving credit during the 2015 Shared National Credit (SNC) examination.


The appeal asserted that the facility should be rated pass due to the financial strength of the servicer, favorable stress test results, and over-collateralization.

The appeal stated that the borrower is a bankruptcy remote special purpose entity established to finance collateral (a diverse pool of senior secured loans), thereby protecting lenders in the event that the seller/servicer enters bankruptcy. The strength of the transaction rests in the bankruptcy remote structure, portfolio diversity, a low advance rate, excess cash flow pledged as collateral, and a dynamic borrowing base to protect lenders in the event of portfolio or servicer deterioration.

The appeal asserted that the servicer provided no additional credit enhancement, as this would adversely affect the lenders’ ability to enforce the bankruptcy remote structure. The servicer is, however, financially sound with high tangible net worth, unencumbered assets, and liquidity. The appeal noted that the facility was heavily over-collateralized by excess cash flow with a maximum 60 percent advance rate resulting in a minimum 166 percent cash flow coverage. As a result, the bank’s in-house modeling and stress testing of “worst case” loan portfolio composition and cash flows demonstrated an exceptionally high level of portfolio resiliency with cash flows in all stress scenarios sufficient to repay lenders in full.


An interagency appeals panel of three senior credit examiners concurred with the bank’s pass rating.

The appeals panel concluded that while the servicer/parent does not guaranty the debt, there is strong collateralization. As of the SNC examination, the agent bank was not requesting or obtaining any financial information on the borrower, including balance sheet, income statements, and projections. Subsequent to the SNC examination, the participant banks provided additional financial information that the appeals panel considered in its decision. Going forward, a more robust cash flow credit analysis by the agent bank is warranted.

The appeals panel corrected the appeal’s assertion of “166 percent cash flow coverage,” as the phrase references the overcollateralization ratio that is part of the collateral quality matrix measured by the servicer to support the advance rate. This percentage is not a measure of cash flow, but rather a collateral-based metric.

The primary reasons for the special mention risk rating centered on the agent bank’s inadequate financial analysis and monitoring of the borrower to assess repayment capacity, as well as the deteriorating financial condition of the parent company. Subsequently, information provided to the SNC appeals panel indicated reasonable controls over the pledged collateral loan pool, advances tied to a borrowing base, dominion of funds, a prudent bankruptcy-remote structure, and satisfactory borrowing base reporting and monitoring in support of a pass risk rating.