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Appeal of Shared National Credit (SNC) (Third Quarter 2015)


An agent bank appealed the substandard/doubtful ratings assigned to a revolving credit during the 2015 Shared National Credit (SNC) examination. The appeal also disagreed with the nonaccrual treatment for the facility.


The appeal asserted that the facility should be rated substandard and remain on accrual status because the borrower had demonstrated an ability to repay the facility with cash flow from operations. As of February 1, 2015, per the bank engineering valuation, the proved developed performing (PDP) reserves and hedges provided for a 1.1 times collateral coverage on the borrowing base.


An interagency appeals panel of three senior credit examiners concurred with the bank’s substandard rating and accrual treatment due to demonstrated and projected ability to service contractual repayment requirements. Projected earnings before interest, taxes, depreciation, and amortization for fiscal year 2015 and 2016 cover contractual debt service 1.6 times and 1.51 times, respectively. While the company had limited liquidity and the line was almost fully drawn, the appeal indicated that the borrower’s deep well reserves migrated to PDP status, which should provide near-term relief and potentially preclude the need for line curtailment.

The appeals panel concluded that the SNC voting team did not diverge from the credit risk rating guidance contained on pages 25 and 26 of the “Oil and Gas Exploration and Production Lending” booklet of the Comptroller’s Handbook, dated March 2016, which each agency has generally adopted for use by its examiners. The SNC voting team applied the loan’s collateral values to the classification amounts in a manner fully consistent with that guidance. While the guidance does allow consideration of proved developed non-performing (PDNP) and proved undeveloped (PUD) values in determining classification amounts, the voting team decided not to include such values in the risk rating decision based upon an analysis of that part of the collateral pool. The booklet gives examiners judgmental discretion if supported by appropriate documentation.

During the SNC appeals process, and only for purposes of the 2015 SNC examination, the interagency SNC management group, working in coordination with regulatory agencies’ credit policy groups, agreed to make the following adjustments to the booklet’s risk rating criteria for loans where repayment is entirely dependent on the value or cash flow generated by the collateral.

Proved developed performing (PDP) reserves 100%—Substandard
Hedges 100%—Substandard
PDNP reserves 70%—Substandard
PDNP reserves 30%—Doubtful
PUD 50%—Doubtful

The interagency decision to apply the revised risk rating criteria to reserve-based loans reflects the agencies’ understanding that engineering valuation techniques and reliability have significantly improved over the past 30 years (since the existing examiner risk rating guidance was actually developed) due to advancements in industry technology and market efficiency. In addition, the risk adjustments to the various reserve value categories are consistent with industry practice.