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Appeal of Shared National Credit (SNC) (Third Quarter 2015)


An agent bank appealed the substandard rating assigned to two credit facilities during the 2015 Shared National Credit (SNC) examination.


The appeal asserted that the facilities should be rated special mention based upon improved financial trends in the first quarter of 2015, ample liquidity, and ability to amortize the debt.

The appeal stated that the borrower provided updated projections based upon first quarter 2015 results which reflect actions the company had already taken to improve performance, such as a switch to higher margin products and reduced capital expenditures. Based upon the updated projections, the company could amortize 100 percent of its bank debt and 31 percent of total debt over seven years. In addition, the appeal asserted that the company had ample liquidity and access to bank financing and the capital markets. Total bank debt was covered more than two times by the enterprise value.


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

The appeals panel acknowledged that the updated May 2015 base case projections showed improved free cash flow, due largely to lower capital expenditures (capex) and the cash impact of changes in working capital. It is questionable how long the company can continue minimal capex, however, without serious revenue degradation. Total leverage was high and is expected to fall in future years, but only if projected earnings before interest, taxes, depreciation, and amortization is realized as minimal principal payments are required for total debt. While projections show the borrower can amortize 100 percent of bank debt in seven years, amortization of total debt is far less with only 33 percent estimated repayment in seven years.

The appeals panel noted that the fixed charge coverage ratio (FCCR) was projected below 1.0 times in 2015 and 2016. While there is availability on the revolver to cover the shortfall, this is a short-term solution and cannot be relied upon indefinitely. In addition, FCCR does not include meaningful amortization of total debt.

The appeals panel acknowledged the possibility of loss on the bank debt was low due to the estimated value of the company coupled with the springing collateral lien that would secure the bank debt under certain conditions. At the present time, however, the bank debt is unsecured and the industry is incurring depressed commodity prices that will affect collateral value should the bank debt become secured.