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A participant bank appealed the troubled debt restructure (TDR) designation assigned to two senior secured, reserve-based revolving credit facilities with a split rating of substandard and doubtful during the first-quarter 2017 Shared National Credit (SNC) examination.
The appeal argued that the nonconforming borrowing base was not a concession granted by the bank group as the amount of the legal claim never changed. The appeal contended that the borrower provided credit enhancements that sufficiently compensated the bank group for a concession granted to the borrower. The credit enhancements included an increase in the mortgage requirement on the oil and gas assets, use of asset sales proceeds to repay the funded balance, prohibition on distributions and payment of management fees, a price increase, and addition of a reserve coverage ratio of 1.50X. The appeal stated that the bank group allowed the borrower time to raise equity to pay down the nonconforming component of the borrowing base. The appeal contended that if the borrower was unsuccessful in securing the required equity, the bank group could compel the borrower to sell assets.
An interagency appeals panel of three senior credit examiners concurred with the SNC examination team’s originally assigned TDR designation, as the borrower was experiencing financial difficulty and the bank group provided a concession.
The nonconforming borrowing base indicated a need for the borrower to reduce debt. The borrower was unable to repay the debt according to the provisions of the credit agreement and the bank group granted a concession by providing a limited waiver of default to negotiate a restructure. The appeals panel evaluated the credit enhancements and concluded that while the actions were reasonable and appropriate, they did not adequately compensate the bank group for the added risk posed by the nonconforming component of the borrowing base and the borrower’s troubled financial condition. The interest rates on the conforming and nonconforming components of the borrowing base do not appear to represent market rates for the risk posed by a borrower with little liquidity and significant financial difficulties. The other modifications in terms and controls received in the restructure are actions to mitigate risk and do not adequately compensate for the elevated risk.