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Appeal of Shared National Credit (First Quarter 2023)

Background

Two participant banks appealed the pass rating assigned to a revolving credit during the first quarter Shared National Credit (SNC) examination.

Discussion

The appeals asserted a substandard rating is more appropriate. The appeals contend the company continues to underperform compared to budget and faces ongoing execution risk and operational challenges surrounding the launch of more competitive products. Specifically, the company experienced higher than expected restructuring costs and pace of pricing declines due to significant competition and disruption from newer technologies. The appeals contend liquidity is strained due to near term debt maturities.

Supervisory Standards

An interagency appeals panel conducted a comprehensive review of the information submitted by the banks 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)

Conclusion

An interagency appeals panel of three senior credit examiners concurred with the SNC examination team’s originally assigned pass rating based on the borrower’s satisfactory primary source of repayment, moderate leverage, and adequate liquidity. The fixed charge coverage ratio for the prior fiscal year-end and trailing 12 months were both satisfactory at above 1.0 times. While the panel acknowledged the declining trend in revenue and earnings before interest, taxes, depreciation, and amortization, they concluded the declines were reliably reflected in the agent bank’s projections as the company developed and brought updated product design to market. Projected repayment capacity from legacy product lines and growth from products under development reflect a seven-year total debt repayment capacity of 94 percent. Satisfactory liquidity is sufficient to cover six months of fixed charges and remains above the minimum liquidity covenant.