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

Background

A participant bank appealed the nonaccrual designation assigned to a revolving credit during the February 2016 SNC examination.

Discussion

The appeal asserted that the credit should be an accruing asset. The appeal acknowledged that the borrower exhibits well-defined weaknesses, with high and increasing leverage levels and deteriorating financial performance caused by declining oil prices and interruptions to operations.

The appeal argued, however, that the parent company has provided written and demonstrated support of the companies it owns and that the borrower’s projected cash flows are sufficient to cover interest expense with interest coverage improving over the projection period. The appeal asserted that the sharp reduction in the company’s estimated capital expenditures is anticipated to provide positive cash available for debt repayment.

Conclusion

The interagency appeals panel of three senior credit examiners concurred with the SNC examination team’s originally assigned nonaccrual (cash basis) designation.

Full repayment of principal and interest is highly questionable based on the projected insufficient fixed charge coverage through 2019. Leverage is high, projections reflect the borrower’s inability to service debt on an amortizing basis, and total debt is expected to increase over the next seven years. The company also has operational uncertainty in several overseas markets.

The appeals panel further concluded that the parent company does not guarantee the debt and that there was insufficient information to demonstrate the ability or willingness to service the borrower’s debt obligations. In addition, the credit was recently amended without obtaining any additional parent company support.