Appeal of Shared National Credit (Third Quarter 2022)

Background

The agent bank appealed the substandard rating assigned to a revolving and term credit during the third quarter Shared National Credit (SNC) examination.

Discussion

The appeal asserted a special mention rating is more appropriate and consistent with the 2021 SNC exam results, as well as the current operating and financial performance of the company. The appeal contended resilient and strong operating and financial performance and long-term contracts that are well-established and sticky in nature, result in reliable revenue, earnings before interest, taxes, depreciation, and amortization (EBITDA), and free cash flow (FCF). The appeal further noted positive FCF in 2022, improved seven-year repayment capacity to 45 percent of total debt, and first lien loan-to-value coverage of approximately 52 percent based on the enterprise value.

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, “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 of three senior credit examiners concurred with the SNC examination team’s originally assigned rating of substandard based on well-defined weaknesses evidenced by the borrower’s weak primary source of repayment and high leverage. The panel acknowledged the reliability of revenue, EBITDA, and FCF. However, the panel noted that projections reflect a falling fixed charge coverage ratio due to increasing fixed costs through fiscal year end 2023, resulting in cumulative FCF available to repay less than 50 percent of outstanding debt over seven years. Leverage (total outstanding debt divided by adjusted EBITDA) for trailing 12 months ending March 31, 2022, is high. High forecasted interest expenses associated with elevated levels of debt and increasing interest rates limits the borrower’s ability to reduce total debt.