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

Background

An agent bank appealed the substandard rating assigned to a revolving credit facility during the August 2016 SNC examination.

Discussion

The appeal asserted that the credit should be rated pass. The appeal argued that the finding of deteriorating financial performance is only accurate when comparing 2015–2016 performance with 2014 and prior performance and that, in fact, the company’s performance has been remarkably consistent, primarily due to the company’s active hedging program. The appeal noted that over the most recent four-quarter period, overall financial performance improved and leverage decreased.

Conclusion

An interagency appeals panel of three senior credit examiners agreed with the appeal and assigned a pass risk rating to the credit.

The appeals panel concluded that the primary source of repayment was satisfactory and that projections indicate the borrower’s future cash flows can repay the reserve-based loan commitment well within 60 percent of the economic life of proved reserves and within 75 percent of the economic life for total secured debt as described in the “Oil and Gas Exploration and Production Lending” booklet of the Comptroller’s Handbook. The appeals panel determined that balance sheet cash and availability under the borrowing base are sufficient to fund operations and budgeted future exploration and development. The borrower has historically hedged its production to alleviate large price variations and has continued to hedge production going forward.