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Appeal of Shared National Credit (First Quarter 2023)

Background

The agent and a participant bank appealed the substandard rating assigned to several revolving credits during the first quarter Shared National Credit (SNC) examination.

Discussion

The appeals asserted a pass rating is more appropriate. The appeals contended the company demonstrated significant and sustained recovery from pandemic induced lows and noted dramatically improved industry trends, strong projected free cash flow, and sufficient fixed charge coverage. The appeals further contended improved leverage (total outstanding debt divided by adjusted earnings before interest, taxes, depreciation, and amortization), sufficient liquidity to support debt repayment, and strong collateral coverage.

Supervisory Standards

An interagency appeals panel conducted a comprehensive review of the information submitted by the banks and relied on the supervisory standards outlined below:

  • 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, updated June 2017 for nonaccrual status)
  • OCC Bulletin 2020-64, “Examinations: Interagency Examiner Guidance for Assessing Safety and Soundness While Considering the Effect of COVID-19 on Institutions”
  • OCC Bulletin 2020-72, “Credit Administration: Joint Statement on Additional Loan Accommodations Related to COVID-19”

Conclusion

An interagency appeals panel of three senior credit examiners agreed with the appealing banks and assigned a pass rating based on a satisfactory primary source of repayment, adequate liquidity, and moderate and improving leverage. The panel concurred with satisfactory repayment capacity due to improved and sufficiently sustained operating performance. The company demonstrated recovery from the COVID-19 pandemic, resulting in an annualized fixed charge coverage ratio of over 1.0 times. Projections are reasonable and indicate cumulative free cash flow sufficient to repay well over 100 percent of total debt within seven years. The satisfactory level of available liquidity, centered in cash and cash equivalents, supports anticipated capital expenditures and debt reduction. Leverage (total outstanding debt divided by adjusted earnings before interest, taxes, depreciation, and amortization) improved significantly, and is projected to further improve with earnings before interest, taxes, depreciation, and amortization growth and continued debt repayment.