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Appeal of Shared National Credit (First Quarter 2021)


A participant bank supervised by the Office of the Comptroller of the Currency (OCC) filed a second-tier appeal to the OCC’s Ombudsman of the decision rendered by the interagency Shared National Credit (SNC) appeals panel during the third quarter interagency SNC review. The bank appealed the special mention rating assigned to a credit facility.


The appeal asserts that the obligor’s credit profile meets the definition of a substandard credit, with well-defined weaknesses in its current operating performance, as evidenced by negative earnings before interest, tax, depreciation and amortization and cash flow, and uncertainty in future projections given the coronavirus disease (COVID-19). The appeal notes that the credit facility is a leveraged loan and there are no reasonable or realistic prospects to de-lever to appropriate levels over the near-term, which is consistent with the definition of a substandard loan in OCC Bulletin 2013-9, “Leveraged Lending: Guidance on Leveraged Lending.” The appeal indicates that the participant bank’s base case projections reflect negative cumulative free cash flow from third quarter 2020 to fiscal year 2026. Finally, the appeal asserts that the obligor’s liquidity does not fully mitigate repayment capacity weaknesses and that a special mention rating is not appropriate.

Supervisory Standards

The Ombudsman conducted a comprehensive review of the appeal and relied on the following supervisory standards:

  • OCC Bulletin 2013-9, “Leveraged Lending: Guidance on Leveraged Lending”
  • OCC Bulletin 2014-55, “Frequently Asked Questions for Implementing March 2013 Interagency Guidance on Leveraged Lending”
  • OCC Bulletin 2020-64, “Examinations: Interagency Examiner Guidance for Assessing Safety and Soundness While Considering with Effect of COVID-19 on Institutions”
  • Comptroller’s Handbook, “Rating Credit Risk” (April 2001)


The Ombudsman agreed with the SNC appeals panel that the credit facility meets the supervisory standards of a special mention rating. The Ombudsman concluded that consistent with existing guidance, the SNC appeals panel evaluated the borrower’s access to liquidity in conjunction with all relevant aspects of credit risk to determine the loan’s risk rating. The credit exhibits potential weaknesses because of adverse operating trends from the impact of capacity restrictions across most of its business operations due to COVID-19. The obligor demonstrates marginal repayment capacity when considering available liquidity to meet operating cash flow shortfalls. While liquidity cannot replace a weak primary source of repayment, it is consistent with guidance from the “Rating Credit Risk” booklet of the Comptroller’s Handbook as well as OCC Bulletin 2014-55, “Leveraged Lending: Frequently Asked Questions for Implementing March 2013 Interagency Guidance on Leveraged Lending,” to consider the level and quality of liquidity when determining a risk rating. Current liquidity levels should provide sufficient support to cover projected cash flow shortfalls during the projected COVID-19 period and recovery.

The Ombudsman found the agent bank projections provided to the SNC examiners, and available to the SNC appeals panel, reasonable and supported, and a key factor in determining that the special mention risk rating was appropriate. The Ombudsman noted that the uncertainties surrounding COVID-19 make it difficult to develop projections. After considering all factors, including current liquidity levels, projections, proven access to capital markets, and competitive industry position, the current repayment and operating issues reflect potential weaknesses that may result in deterioration of repayment prospects at some future date.

The Ombudsman agreed with the SNC appeals panel that liquidity sufficiency depends on the length of COVID-19 restrictions and the borrower's ability to meet projected financial performance. The potential weakness transitions to a well-defined weakness if the actual COVID-19 recovery time lags projected recovery and liquidity does not demonstrate sufficient support of cash flow deficits.