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

Background

Several participant banks appealed the special mention ratings assigned to two credit facilities during the August 2016 SNC examination.

Discussion

The appeals asserted that the facilities should be rated pass. The appeals argued that the company has moderate leverage, strong market capitalization, liquidity, and access to capital markets. In addition, the appeals argued that the special mention rating did not factor in a recent equity issuance or a prospective acquisition.

Conclusion

An interagency appeals panel of three senior credit examiners concurred with the SNC examination team’s originally assigned risk ratings of special mention.

The appeals panel concluded that the special mention ratings are appropriate due to declining financial performance, diminished operating cash flow, and elevated leverage that reflect potential credit weaknesses. For the fiscal year ending December 31, 2015, earnings before interest, taxes, depreciation, amortization, and exploration expenses declined significantly and continued to decline through the trailing 12 months ending June 30, 2016. Projections indicated negative free cash flow through year-end 2016 and increasing leverage. The appeals panel noted further support for the assigned risk ratings based on the unsecured loan structure in the context of financial performance, elevated leverage, and unstable underlying oil and gas market conditions.

The appeals panel considered actions the company has taken to offset the weaker financial results. These actions, including successful cost-cutting and capital-raising activities, are credit positive, as are the company’s capitalization, access to capital markets, and liquidity position. While these factors mitigated classification of these credits, they did not support upgrading the loans to pass.

The assigned ratings do not incorporate pro forma financial results for acquisitions that had not closed as of the rating date.