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

Background

A participant bank appealed the special mention rating assigned to a revolving credit during the 2015 Shared National Credit (SNC) examination.

Discussion

The appeal asserted that the credit facility should be rated pass because it was structured as a traditional asset-based loan (ABL) revolving credit facility with strong collateral controls and conforming advance rates.

The appeal stated that collateral consists of a first lien on the borrower’s working capital assets, certain real estate properties, and general intangibles. The primary source of repayment is the conversion of working capital. Liquidity consists of cash and excess borrowing capacity under the facility. Collateral coverage during 2014 totaled 4.0 times.

Conclusion

An interagency appeals panel of three senior credit examiners concurred with the bank’s pass rating due to the ABL credit structure, adequate liquidity, and reasonable line usage. The company’s collateral coverage appeared to be adequate with a good net availability position. Specifically, the borrowing base certificate showed a high level of excess availability and availability ranges were high in the prior year.

The appeals panel noted that SNC examination voters identified concerns with the high 90 percent inventory advance rates, low minimum availability, and low cash dominion threshold reflecting less than 10 percent of the committed facility amount. These credit administration concerns warrant agent bank attention during future modifications of the loan agreement.

Both the bank and SNC examination voters concurred that the company had experienced poor financial performance in recent years, generated negative cash flow, and supported high leverage. The company reported a net loss at fiscal years ending 2014 and 2015. Total revenue at fiscal year ending 2015, however, was immaterially below budgeted expectations.