Appeal of Shared National Credit (First Quarter 2024)

Background

The agent bank appealed the special mention rating assigned to a revolving credit during the first quarter 2024 Shared National Credit (SNC) examination.

Discussion

The bank asserted that a pass rating was more appropriate due to the company demonstrating positive performance to plan and payment performance. The appeal highlighted positive free cash flow, consistent revenue growth, and significant liquid assets.

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 special mention rating based on the borrower’s marginal operating performance and high leverage. The borrower had yet to demonstrate sustainable positive operating cash flow due to high expenses. While free cash flow was positive, the borrower historically relied entirely on changes in working capital or interest income, which are not sustainable core business operations. Leverage was high and remained high even after a recent debt pay down. Metrics deteriorated further after including the impact from the current acquisition. Cash liquidity was not a sustainable repayment source and did not offset the identified potential weaknesses.