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

Background

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

Discussion

The appeals asserted that the credit should be rated special mention. The appeal argued that despite the decline in revenues and earnings due to depressed commodity prices, the borrower has adequate cash flow to cover fixed charges. In addition, a restructuring of the revolver provided financial flexibility to the company and an improved credit structure to the banks.

Conclusion

An interagency appeals panel of three senior credit examiners agreed with the appeal and assigned a special mention risk rating.

The appeals panel concluded that a special mention rating is appropriate. The appeals panel determined that actions taken by the company to sell assets and reduce debt, build liquidity, and support cash flow needs were credit positives that mitigate classification of the credit. The cash raised is projected to meet liquidity needs through the facility’s maturity. In addition, the company has enacted cost-cutting measures, idled rigs, and reduced capital expenditure budgets.

Despite this positive response by management, the company continues to experience adverse financial trends due to declining oil and gas prices. Revenues, net income, and operating cash flows to service debt have declined significantly. In addition, leverage is projected to increase in the near term due to declining earnings before interest, taxes, depreciation, and amortization. These potential credit weaknesses may result in deterioration of repayment prospects for the credit at some future date.