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A participant bank appealed the nonaccrual substandard ratings assigned to two revolving credit facilities during the 2015 Shared National Credit (SNC) examination.
The appeal asserted that the facilities should be rated pass because they were governed by a borrowing base (BB) with periodic field exams, ensuring adequate collateral protection and full collection of principal and interest. The appeal stated that the company had $84 million of unused BB availability, which fully supported the company’s cash flow and provided sufficient liquidity to cover cash burn for over 7.5 years. The appeal also asserted that a definitive merger agreement with another company provided further support of the company’s asset value.
An interagency appeals panel of three senior credit examiners concurred with the SNC examination team’s originally assigned risk rating of substandard and nonaccrual treatment.
The appeals panel determined that the revolving credit was not a conforming asset-based lending structure, as illiquid fixed assets (underground storage facilities) comprised 48 percent of the BB. Underground storage facilities contain what is known as “base gas” or “cushion gas”, which is the volume of gas that must remain in the storage facility to provide the required pressurization to extract the working gas component. Cushion gas is deemed by the industry as an integral component of the borrower’s operating fixed assets. Excluding fixed assets from the BB resulted in an over-advance of $60 million.
The appeals panel noted the bank acknowledged that the company’s fiscal year-end (FYE) 2015 revenues and earnings before interest, taxes, depreciation, and amortization (EBITDA) evidenced declining performance from FYE 2014 revenues and EBITDA. Free cash flow, excluding the one-time contract termination fee, was insufficient to cover fixed charges, with a fixed charge coverage below 1.0 times.
The appeals panel stated that the borrower’s definitive merger agreement with another company was a subsequent event that was not part of the original SNC voting consideration. In addition, while the definitive merger may reduce the debt repayment risk, the transaction would not consummate for several months.