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Appeal of Shared National Credit (Third Quarter 2022)


A participant bank appealed the substandard rating assigned to a revolving line of credit during the third quarter Shared National Credit (SNC) examination.


The appeal asserted a special mention rating was appropriate. The appeal’s rating support was based on the company’s continued revenue and user growth underpinned by very strong liquidity with no funded debt, as well as demonstrated access to capital market funding mitigating the negative near-term cash flow.

Supervisory Standards

An interagency appeals panel conducted a comprehensive review of the information submitted by the bank and relied on the supervisory standards outlined below:

  • Comptroller’s Handbook, “Commercial Loans” (Narrative—March 1990, Procedures—March 1998)
  • Comptroller’s Handbook, “Leveraged Lending” (February 2008)
  • Comptroller’s Handbook, “Rating Credit Risk” (April 2001, updated June 2017 for nonaccrual status)
  • OCC Bulletin 2020-64, “Examinations: Interagency Examiner Guidance for Assessing Safety and Soundness While Considering the Effect of COVID-19 on Institutions”
  • OCC Bulletin 2013-9, “Leveraged Lending: Guidance on Leveraged Lending”


An interagency appeals panel of three senior credit examiners concurred with the SNC examination team’s originally assigned substandard rating based on well-defined weaknesses of weak primary source of repayment and weak performance to plan. The borrower has not achieved profitability and depended on capital raises to cover cash flow shortfalls. Although revenues increased, adjusted earnings before interest, taxes, debt, and amortization and free cash flow (FCF) were negative through six months ending June 30, 2022. Higher than forecasted operating expenditures have yet to result in sufficient revenue growth. Original underwriting projections anticipated positive FCF by year-end 2021. Revised 2021 projections forecast positive FCF by 2024; interim 2022 results, however, show underperformance to revised projections. While the 2021 capital raise strengthens balance sheet liquidity supporting near term weaknesses with the primary source of repayment, lack of profitability and continued underperformance to plan are common characteristics of substandard assets.