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


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


The appeal asserted that the facility should be rated pass because a recent one-off event does not change the underlying business fundamentals. The appeal listed several mitigants to the risk rating, including immateriality of the one program relative to its total revenues and profitability; modest leverage and strong backlog evidencing underlying fundamental strength; irreplaceable and entrenched market position; on-going affordability initiatives expected to drive improvement in margins; and current and prospective debt repayment capacity and liquidity.

The appeal noted its critical relationships with the government agencies would unlikely be adversely affected by any outcome of the investigation into the cause of the one-off event due to limited choices to accomplish the customers’ strategic missions.


An interagency appeals panel of three senior credit examiners concurred with the SNC examination team’s originally assigned risk rating of special mention.

The appeals panel acknowledged that the relative contribution of the one program was small in the context of the borrower’s historical revenues, profitability, and expectations for future business opportunities. The appeals panel also acknowledged the quality of the borrower’s credit risk profile, historical financial performance (absent recent costs specific to the one-off event), and the possibility of improving margins given the company’s restructuring plans.

The appeals panel concluded, however, that it was prudent to recognize the potential weakness that there is substantial uncertainty associated with the ongoing investigation into the cause of the one-off event overshadowing any known mitigants. Events that affect reputational risk often result in disproportionate financial consequences. Even though business relationships may not be interrupted or revenues immediately affected, costs to rectify ineffective controls may materially affect the obligor’s ability to repay its debt in accordance with its terms and fund potential out-of-pocket expenses beyond any paid insurable claim.