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


A participant bank appealed the substandard rating assigned to a revolving credit during the February 2016 SNC examination.


The appeal asserted that the credit should be rated pass. The appeal acknowledged that revenue and earnings before interest, taxes, depreciation, and amortization have declined due to the downturn in oil and gas prices.

The appeal argued that it is appropriate to add back non-cash expenses when calculating earnings for the borrower and that including non-cash expenses in cash flow supports a pass rating.


The interagency appeals panel of three senior credit examiners concurred with the SNC examination team’s originally assigned risk rating of substandard.

The appeals panel determined that the substandard risk rating is warranted based on well-defined weaknesses, including the borrower’s high leverage and projected inability to repay the reserve-based loan and total debt within a reasonable time frame based on the economic life of the collateral. The appeals panel concluded that cash flow projections, including appropriate non-cash expenses, reflect insufficient free cash flow over the next three years. Oil production, along with capital spending, is projected to decline over that same time period.