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Appeal of Shared National Credit (Third Quarter 2017)


An agent bank supervised by the Office of the Comptroller of the Currency appealed the special mention rating assigned to a revolving credit and a term loan during the third-quarter 2017 Shared National Credit (SNC) examination.


The appeal asserts that a pass rating is warranted because of the borrower’s demonstrated record of reducing leverage and acceptable projected repayment capacity.

The appeal argues that moderate leverage is not a legitimate rationale for the special mention rating, as the company maintains a stable business profile and has demonstrated the ability to de-leverage. The appeal cites a decline from peak debt to earnings before income, taxes, depreciation and amortization (EBITDA) leverage of over seven times in 2014 to a level that is five and one-half times based on use of proceeds from a recent initial public offering (IPO) to reduce debt.

The appeal asserts that the company is expected to repay over 50 percent of the total debt within seven years based on the appealing bank’s model that includes reasonable growth assumptions, excluding non-contractual discretionary investments in the expansion of the borrower’s footprint.


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

The appeals panel found that repayment from projected free cash flow was inadequate to reduce leverage in a timely manner, the loan structure was weak, and cash flow was insufficient to cover current fixed charges.

The appeals panel acknowledged the positive debt reduction from the recent IPO proceeds and asset sales but found that planned capital expenditures differed from the appealing bank’s model assumptions, which could materially reduce debt repayment. Using the borrower’s projections, repayment capacity fell to 36 percent of total debt over seven years. Adjusting the borrower assumptions for potential asset sales improved the repayment capacity to 48 percent. The ability to realize improvements in free cash flow, however, is predicated on the borrower’s willingness and ability to continue expanding the business through targeted acquisitions.

The appeals panel found that the loan structure was weak with only one financial covenant for senior secured leverage and ability to access a significant level of additional debt through incremental facilities. Senior secured leverage could increase to 7.5 times adjusted EBITDA, providing significant leeway between the covenant and actual trailing twelve month (TTM) senior secured leverage of 5.3 times adjusted EBITDA, as of the examination. The loan structure also allows the borrower to incur additional incremental term debt as well as unlimited debt based on a ratio of six and one-half times a net debt (debt less cash) to EBITDA leverage test.

The appeals panel noted that fixed-charge coverage based on operating cash flows (adjusted EBITDA plus rents) divided by fixed charges (current maturing long-term debt plus cash interest, taxes, dividends, and capital expenditures) was weak. A fixed-charge coverage ratio of 0.82 times on the most recent fiscal year-end and 0.85 times for the most recent TTM period indicates insufficient operating cash flows to cover fixed charges.