Appeal of Shared National Credit (First Quarter 2023)

Background

A participant bank appealed the pass rating assigned to an asset-based revolving credit facility during the first quarter Shared National Credit (SNC) examination.

Discussion

The appeal asserted a substandard rating is more appropriate. The appeal acknowledged the conforming nature of the asset-based lending structure but noted material refinancing risk and heightened probability of default over the next 12 months due to the company’s weak liquidity profile and near-term maturing debt. According to the participant bank’s projections, the company’s leverage is expected to remain elevated above six times through the seven-year projection period. The appeal contends on-balance sheet liquidity is minimal and free cash flow, given ongoing capital expenditure burden, results in negative working capital.

Supervisory Standards

An interagency appeals panel conducted a comprehensive review of the information submitted by the bank 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, “Asset-Based Lending” (January 2017)
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 satisfactory primary source of repayment and liquidity. The revolving line of credit has a fully collateralized, conforming asset-based lending structure with reasonable advance rates and appropriate controls. While the panel acknowledged an extended operating cycle and elevated leverage, the panel confirmed the conversion of working capital assets covers outstanding debt, including letters of credit and reserves. The fixed charge coverage ratio for the trailing 12 months is adequate, and liquidity is satisfactory to support operational needs with no projected cash burn.