Skip navigation
Ensuring a Safe and Sound Federal Banking System for All Americans Site Map | Text Size: S M L

BankNet

BankNet
Resources for bankers

Appeal of Shared National Credit (SNC)-(Fourth Quarter 2016)

Background

Several participant banks appealed the substandard rating assigned to a credit facility during the August 2016 SNC examination.

Discussion

The appeals asserted that the credit should be rated pass. The appeals argued that the borrower, on both a stand-alone and consolidated basis, possesses acceptable leverage, sufficient liquidity to fund working capital and contracted/maintenance capital expenditures (capex), access to the capital markets, and sufficient free cash flow to repay total debt in excess of 50 percent within seven years.

Conclusion

An interagency appeals panel of three senior credit examiners concurred with the SNC examination team’s originally assigned risk rating of substandard.

The appeals panel concluded that the credit warranted a substandard rating based on consolidated repayment capacity projections, which reflect the company’s inability to de-lever total debt over a reasonable time frame. Inadequate repayment capacity is a well-defined credit weakness, and the appeals panel determined that projections for the company reflect de-levering capacity of substantially under 50 percent of consolidated funded debt in seven years. Projections reflect that significant capex are necessary to sustain revenues and were included in the free cash flow calculation. Projections also include required dividend payments associated with the company’s preferred stock. These dividend payments are included as fixed charges because the preferred stock issue incorporates debt-like attributes. Leverage is projected to increase through 2018, due to debt funding common dividend payments and other operational needs.