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

Background

A participant bank appealed the special mention rating assigned to a revolving credit facility during the August 2016 SNC examination.

Discussion

The appeal asserted that the credit should be rated pass. The appeal acknowledged the risks identified by the SNC examiners, including declining revenues, increasing leverage, and a challenging operating environment. The appeal argued, however, that the borrower is well positioned to withstand the current downturn given its conservative management team, manageable debt maturity profile and new build capital expenditures commitments, ample liquidity, high asset quality, ability to generate positive free cash flow for the next four years, and continued access to both the equity capital markets and loan markets.

Conclusion

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

The appeals panel concluded that the special mention rating is appropriate due to adverse financial performance, including declining revenues, reduced production, declining backlog, and a significant reduction in free cash flow. Low oil prices have caused the borrower to scale back offshore drilling. While actions taken by management have put the company in a better position, the decline in revenue forced reductions in capital expenditures and resulted in declining free cash flow and increased leverage.

The appeals panel concluded that an additional concern supporting a special mention rating is the borrower’s declining contract backlog, which is low compared to peer. A recent termination of rigs resulted in a significant backlog loss. These weaknesses, if left uncorrected, may result in deterioration of future repayment ability.