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A participant bank appealed the pass risk rating assigned to a revolving credit during the third quarter 2020 Shared National Credit (SNC) examination.
The appeal asserted that a substandard rating is more appropriate. The appeal acknowledged the obligor’s strong liquidity position but held a more conservative view of financial projections, including the length and severity of impact to operations from COVID-19. The appeal asserted that weaknesses in current operations and a more conservative view of the projections demonstrated lack of a reasonable prospect to deleverage, as well as nominal repayment capacity.
The interagency appeals panel conducted a comprehensive review of the information submitted by the bank, and relied on the supervisory standards outlined below:
An interagency appeals panel of three senior credit examiners overturned the pass risk rating assigned by the SNC review team and assigned a special mention risk rating. The obligor’s marginal repayment capacity and adverse operating trends attributable to COVID-19 restrictions were potential weaknesses that may result in deterioration of repayment prospects at some future date.
The appeals panel concluded that weaknesses in current and projected repayment capacity, coupled with satisfactory liquidity, more accurately reflected a potential weakness in the obligor’s overall repayment capacity. In addition, while liquidity was satisfactory and sufficient to cover projected cash burn and debt maturities over the short term, it did not fully mitigate weaknesses in the obligor’s capacity to repay debt through positive operating cash flow during the short term. The appeals panel concluded that liquidity sufficiency was dependent on the length of COVID-19 restrictions and the obligor’s ability to meet projections.