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Appeal of Shared National Credit (Third Quarter 2014)


A participant bank appealed the special mention rating assigned to a term loan and a revolving credit facility during the 2014 Shared National Credit (SNC) examination.


The appeal argued that the facilities should be rated pass. The company’s fiscal year 2013 earnings before interest, tax, depreciation, and amortization expense (EBITDA) was only 7 percent lower than budget and the company would have to miss cumulative free cash flow (FCF) projections by over 70 percent to not meet key regulatory hurdles for repayment. The company’s strong repayment projections also indicate substantial cushion for temporary cyclical softness.

The appeal also stated that the fixed charge coverage (FCC) ratio, excluding growth capital expenditures, is 1.89 times for fiscal year 2013 compared to the SNC examination team’s calculated ratio of 1.01 times, which includes all capital expenditures. Finally, the bank noted that secured leverage and total leverage is only 2.62 times and 4.24 times as of March 31, 2014, respectively and a subsequent IPO resulted in a substantial reduction in the term loan reducing the pro-forma net secured and total leverage ratios to 2.05 times and 3.67 times, respectively.


An interagency appeals panel of three senior credit examiners agreed with the bank’s pass rating for the two facilities.

The appeals panel agreed with the bank that the EBITDA miss was minor when factoring in the obligor’s strong repayment projections, which indicates a solid cushion for potential market softness. In addition, despite the EBITDA projection miss, adjusted EBITDA increased 6 percent from 2012 to 2013 indicating a positive trend. The appeals panel included growth capital expenditures when calculating FCC for fiscal year 2013, but also noted that the projected fiscal year 2014 FCC ratio is 1.4 times indicating adequate ability to cover all fixed charges.

Finally, although the post-IPO debt repayment on the term loan occurred subsequent to the SNC submission date, the appeals panel considered this event because the IPO was discussed during the SNC examination. The event occurred seven days subsequent to the SNC closing date.