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Appeal of Shared National Credit (First Quarter 2021)


A participant bank appealed the special mention risk rating assigned to a revolving credit during the first quarter 2021 Shared National Credit (SNC) examination.


The appeal asserted that a pass rating is more appropriate. The appeal acknowledged that COVID-19 impacted the borrower. The appeal asserted, however, that the substantive impact was transitory and, for the most part, addressed by management's rapid responses. Management responses included, a reduction in non-essential spending for capital improvements, discontinuation of share repurchase program(s), a reduction in general and administrative expenses, and a reduction in staffing levels. The appeal further contended that the borrower's improved financial performance in the second half of 2020, combined with the company's strong balance sheet, offered support for a pass rating.

Supervisory Standards

The 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, "Guidance on Leveraged Lending"
  • OCC Bulletin 2014-55, "Frequently Asked Questions for Implementing March 2013 Interagency Guidance on Leveraged Lending"
  • OCC Bulletin 2020-35, "Troubled Debt Restructurings: Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working With Customers Affected by COVID-19 (Revised)"
  • OCC Bulletin 2020-64, "Examinations: Interagency Examiner Guidance for Assessing Safety and Soundness While Considering with Effect of COVID-19 on Institutions"
  • OCC Bulletin 2020-72, "Credit Administration: Joint Statement on Additional Loan Accommodations Related to COVID-19"


An interagency appeals panel of three senior credit examiners concurred with the SNC review team's originally assigned special mention rating. The borrower took measures to reduce expenses and staffing levels. However, the credit exhibits potential weaknesses. The appeals panel found that the revenue decline triggered by COVID-19 led to a marginal primary source of repayment, marginal performance to plan, and high leverage. The appeals panel acknowledged the borrower's liquidity position and positive free cash flow (FCF) generated in the second half of 2020. Liquidity, however, does not mitigate fully the impact of reduced demand on current and near-term operating performance. Further, despite modest levels of positive FCF in the third and fourth quarters of 2020, the trailing twelve months fixed charge coverage continued to decline, leverage continued to increase, and the timing for sustained recovery was unclear.