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A participant bank appealed the 57 percent doubtful and 43 percent loss ratings assigned to a second lien term loan during the 2015 Shared National Credit (SNC) examination.
The appeal asserted that the facility should be rated 100 percent substandard. The appeal expressed concerns that no collateral values were applied for proved developed non-performing and proved undeveloped reserves or other assets in which the borrower had an interest.
An interagency appeals panel of three senior credit examiners adjusted the rating to 100 percent substandard. The appeals panel noted that cash flow (CF) was sufficient to support repayment according to contractual terms. CF was not, however, sufficient at existing commodity prices to support repayment of both the revolving credit and the second lien term debt within a reasonable time horizon. Comparison of the most recent year CF to debt service requirements based on contractual terms is a flawed approach because it does not include analysis of projections that are fundamental to understanding the plans and cost to develop oil and gas reserves into income producing assets.
The appeals panel concluded that all variations of the borrower’s projections reflect CF stress, increasing debt levels, and liquidity depletion over the projection periods. The bank projection period is two years and reflects the least degree of CF stress because the estimated capital expenditure (capex) is reduced by 40 percent in 2015 and 68 percent in 2016. There is no evidence that the borrower intends to reduce or postpone capex in the borrower or agent bank prepared projections for the term credit facility. Both projections have seven year time horizons and reflect higher levels of capex causing larger and more prolonged CF weaknesses.
The appeals panel concluded that none of the various forecasting approaches reflect planned capex and commodity prices consistent with current market conditions, but all forecasts indicate that it was not economically viable for the borrower to develop oil and gas reserves at existing commodity prices.