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Appeal of Shared National Credit (Third Quarter 2018)


An agent bank appealed the substandard rating assigned to a term credit reviewed during the third quarter 2018 Shared National Credit (SNC) examination.


The appeal argued that a special mention rating was more appropriate due to potential weaknesses related to the obligor’s plans to deleverage and address operating weaknesses. The appeal acknowledged a decline in operating performance measured by the obligor’s earnings before interest, taxes, depreciation, and amortization, but asserted that changes in customer composition will improve prospective profitability. The appeal estimated repayment capacity of 50 percent of total debt within seven years, if the examiners had included asset disposal proceeds amounting to 10 percent of gross debt.


An interagency appeals panel of three senior credit examiners concurred with the SNC examination team’s originally assigned rating of substandard.

The decline in operating performance and insufficient capacity to deleverage the company in a reasonable time frame were well-defined weaknesses. Operating performance was well below the plan due to strong competition, service quality issues, and unrealized growth from prior strategic decisions. In addition, recently revised third-party financial forecasts indicated repayment capacity of only 40 percent of total debt in seven years.

The appeals panel acknowledged the potential impact of key assumptions on expected repayment capacity. However, given the absence of borrower-provided guidance or financial forecast, the appeals panel concluded that the examiner analysis was well supported.