Appeal of Shared National Credit (First Quarter 2024)

Background

A participant bank appealed the substandard rating assigned to a revolving credit during the first quarter 2024 Shared National Credit (SNC) examination.

Discussion

The bank asserted that a special mention rating was more appropriate based on the company’s demonstrated performance to plan, improved leverage, and anticipated positive free cash flow in fiscal year 2024. The bank also cited the company’s strong liquidity to support debt repayment and positive performance outlook.

Supervisory Standards

An interagency appeals panel conducted a comprehensive review of the appeal and relied on the following supervisory guidance:

• 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, “Leveraged Lending: Guidance on Leveraged Lending”

Conclusion

An interagency appeals panel concurred with the SNC examination team’s originally assigned substandard rating based on the borrower’s weak primary source of repayment, weak performance to plan, and high leverage. Repayment capacity is insufficient, and trailing 12-month free cash flow is negative. While the appeal asserts demonstrated performance to plan, the company has revised projections downward twice since origination due to underperformance. While leverage did improve, it remains high. Positive performance outlook, including projected positive free cash flow, is based on synergies that the company has not yet achieved and must demonstrate before warranting a rating upgrade. Satisfactory liquidity does not offset the identified well-defined weaknesses.