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

Background

A participant bank appealed the nonaccrual designation assigned to a credit facility during the August 2016 SNC examination.

Discussion

The appeal asserted that the credit should remain on accrual because collection of the funded reserve-based loan (RBL) is not in doubt, nor is collateral support marginal due to the significant collateral coverage the RBL maintains. The appeal argued that the borrower continues to make principal payments and that, while the sale of assets is an option to pay off the debt, it is not the only option.

Conclusion

An interagency appeals panel of three senior credit examiners concurred with the SNC examination team’s nonaccrual designation.

The appeals panel concluded that nonaccrual treatment is appropriate given the company’s debt structure and doubts about the full collectability of total debt. The company’s total debt structure includes both the senior secured RBL as well as senior unsecured notes that have payment priority pari passu with the RBL. Given the common source of repayment, the determination of accrual status considers the entire debt structure. The borrower’s projected inability to repay total principal and interest over a reasonable time frame supports the nonaccrual designation. Further, the borrower has been unsuccessful at divesting assets to enhance the balance sheet, and liquidity is weak.