Appeal of Shared National Credit (First Quarter 2019)

Background

Two participant banks appealed the substandard rating assigned to a revolving credit agented by a national bank and reviewed during the first quarter 2019 Shared National Credit (SNC) examination.

Discussion

One participant bank’s appeal asserted that a pass rating was more appropriate, while the other appeal asserted a special mention rating. The appeals contended that operating performance weaknesses were temporary and that the borrower was capable of generating sufficient free cash flow to repay most or all of the outstanding debt within seven years. In both appeals, the participant banks acknowledged the obligor’s weak performance to the plan and high leverage (total debt to book capitalization) but noted that the leverage level was typical of a pass rated credit given the operational changes that could be employed for the industry in which it operates.

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 2005-32, "Frequently Asked Questions: Residential Tract Development Lending" (September 2005)
Comptroller’s Handbook, "Commercial Real Estate Lending" (January 2017)
Comptroller’s Handbook, "Rating Credit Risk" (April 2001)

Conclusion

An interagency appeals panel of three senior credit examiners concurred with the SNC examination team’s originally assigned rating of substandard due to well-defined weaknesses such as weak repayment capacity, weak performance to the plan, and high leverage.

The appeals panel determined that repayment estimates based on available earnings before interest, taxes, depreciation, and amortization (EBITDA) adjusted for noncash impairment expense was insufficient to repay total debt within a reasonable time frame. Although both appeals provided repayment estimates suggesting adequate repayment capacity, the appeals panel concluded that the assumptions in the respective appeals excluded expenses typically included in regulatory repayment estimates. The appeals panel found insufficient support for the appeal assertion that the duration of the deficiencies was temporary, and concluded that the deviation from the plan was a well-defined credit weakness. The appeals panel also found that leverage, based on total debt to book capitalization of 62 percent for the period reviewed was high for this borrower.