Appeal of Shared National Credit (Third Quarter 2024)

Background

A participant bank appealed the accrual status of a substandard-rated revolving credit during the third quarter 2024 Shared National Credit (SNC) examination.

Discussion

The appeal asserted that nonaccrual status was appropriate because the primary source of repayment has well-defined weaknesses and the secondary source of repayment, based upon enterprise value, provides less than full coverage of the total debt. The appeal noted capital structure deterioration, distressed debt pricing, and the potential for debt restructuring.

Supervisory Standards

An interagency appeals panel conducted a comprehensive review of the appeal and relied on the supervisory standards outlined below:

• 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 accrual status. Although the borrower had structural weaknesses and limited enterprise value, the borrower addressed near- and medium-term debt maturities and maintained sufficient liquidity, reducing reliance on secondary repayment sources. Ongoing positive cash flow and alignment with revised projections supported continued accrual treatment.