Appeal of Shared National Credit (First Quarter 2019)

Background

An agent bank appealed the substandard ratings assigned to a revolving and term credit reviewed during the first quarter 2019 Shared National Credit (SNC) examination.

Discussion

The appeal asserted that a pass rating is more appropriate. The appeal contended that nonrecurring and unexpected events were mitigating factors for the obligor’s material off-plan performance. The appeal asserted that the obligor’s operating performance met revised projections, which demonstrated repayment of 51 percent of the total debt within seven years. The appeal acknowledged the elevated leverage (total outstanding debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA) adjusted for nonrecurring and noncash charges) of 7.4 times but indicated that the nature of the business allows it to operate with higher leverage.

Supervisory Standards

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

OCC Bulletin 2013-9, "Guidance on Leveraged Lending"
OCC Bulletin 2014-55, "Frequently Asked Questions for Implementing March 2013 Interagency Guidance on Leveraged Lending"
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)

Conclusion

An interagency appeals panel of three senior credit examiners assigned a rating of special mention that was different from those of both the bank and the examiners. The appeals panel identified potential weaknesses associated with weak performance to the plan, marginal repayment capacity, and high leverage.

The appeals panel concurred with many of the observations noted in the appeal, including the factors that resulted in significant underperformance in borrower operations compared with original projections. The appeals panel also acknowledged the improved performance relative to revised projections, but determined that execution risk is elevated given the extended time frame needed to fully realize growth and margin targets supporting the repayment estimate. The appeals panel concurred with the examiners that leverage was high at 7.4 times for the period reviewed.