Appeal of Shared National Credit (First Quarter 2021)
A participant bank appealed the substandard risk rating assigned to a revolving credit and two term facilities during the first quarter 2021 Shared National Credit (SNC) examination.
The appeal asserted that a pass rating was more appropriate. The appeal indicated the company achieved earnings before interest, taxes, and depreciation (EBITDA) growth, demonstrated improved financial metrics with levered free cash flow exceeding the bank's projections, and deleveraged significantly since 2019. The appeal asserted that the company has a leading market position in its main industry and has a substantial portion of its revenue coming from product lines in which the company has the number one market position.
The 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 2013-9, "Guidance on Leveraged Lending"
- OCC Bulletin 2014-55, "Frequently Asked Questions for Implementing March 2013 Interagency Guidance on Leveraged Lending"
- OCC Bulletin 2020-35, "Troubled Debt Restructurings: Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working With Customers Affected by COVID-19 (Revised)"
- OCC Bulletin 2020-64, "Examinations: Interagency Examiner Guidance for Assessing Safety and Soundness While Considering the Effect of COVID-19 on Institutions"
- OCC Bulletin 2020-72, "Credit Administration: Joint Statement on Additional Loan Accommodations Related to COVID-19"
An interagency appeals panel of three senior credit examiners concurred with the SNC review team's originally assigned substandard rating. The panel noted that the borrower's weak performance to plan, weak primary source of repayment, and high leverage were well defined weaknesses. Financial results are negatively impacted by lower pricing, volume declines, and increased supply chain costs. While 2020 performance to plan had improved compared to 2019, the 2020 adjusted EBITDA was lower than projected. Projections indicated weak repayment capacity of total debt over seven years. Leverage is high and not projected to materially improve in the near term.