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This document is the property of the OCC, FRB, and FDIC. Its contents are strictly confidential. Unauthorized disclosure of the contents of this presentation is prohibited under 12 CFR 4 (OCC), 12 CFR 309 (FDIC), and 12 CFR 261 (FRB).

1Q 2020 Exam

Shared National Credit (SNC) Exam

Job Aids Linecard

Worksheets  Leverage  Oil & Gas  Asset-Based

This document includes guidance for completing the interagency SNC line card (Line card job aid). While this guidance has been jointly developed by the Interagency working group, the contents herein are not policy. There is no expectation or desire that every item included in this guidance be addressed in every line card completed.

As a general rule, line card documentation should be completed using risk-based principles. The level of support provided should be commensurate with the complexities and level of risk observed. The completed line card information should reflect the examiner’s informed opinion and should not simply copy the bank’s opinion from bank developed documents such as credit approval memos.

Questions regarding the level of detail needed should be directed to exam team leadership (Team Leaders and EICs) with escalation to the National Coordinators as needed.

1Q 2020 Exam

Table of Contents SNC Exam Line Card Documentation Job Aid ............................................................ 5

Help Documents ............................................................................................................................. 5

Helpful Tips ..................................................................................................................................... 5

Line card Attachments ................................................................................................................... 6

Line card Documentation Objectives ............................................................................................. 7

Review Bank/Obligor ...................................................................................................................... 7

Background ................................................................................................................................. 8

Co-Obligors ................................................................................................................................. 9

Sponsors ..................................................................................................................................... 9

Internal Rating ............................................................................................................................ 9

Credit Facilities ............................................................................................................................. 10

Payment Schedule and Detailed Repayment Schedule ........................................................... 11

Ratings ...................................................................................................................................... 12

Lender Protection ......................................................................................................................... 13

Guarantors ................................................................................................................................ 14

Collateral ................................................................................................................................... 15

Covenants ................................................................................................................................. 16

Enterprise Valuation (EntV) ...................................................................................................... 17

Financial Analysis.......................................................................................................................... 19

Conclusion ................................................................................................................................ 21

Repayment Capacity from Primary Source .............................................................................. 22

Repayment Capacity from Secondary Source .......................................................................... 26

Performance to Plan ................................................................................................................. 27

Leverage .................................................................................................................................... 28

Liquidity .................................................................................................................................... 28

Management/ Surveys ................................................................................................................. 30

Discussions with Management ................................................................................................. 31

Risk Management ..................................................................................................................... 32

Table of Contents contains hyper-links

1Q 2020 Exam

Transaction Structure ............................................................................................................... 32

Stress Testing / Sensitivity Analysis .......................................................................................... 35

Refinancing Risk ........................................................................................................................ 36

Surveys ...................................................................................................................................... 37

QA ................................................................................................................................................. 38

Voter Ratings ................................................................................................................................ 39

Write-up ....................................................................................................................................... 42

Signoff ........................................................................................................................................... 47

Appendix ...................................................................................................................................... 48

Asset-Based Loan Line Card Documentation Job Aid .............................................. 49

Leveraged Loan Cash Flow Worksheet Job Aid ....................................................... 55

Objective ...................................................................................................................................... 55

Multiple CFWS .............................................................................................................................. 55

Full CFWS .................................................................................................................................. 55

Abbreviated CFWS .................................................................................................................... 56

Procedures to Access and Save CFWS in SNCnet ......................................................................... 56

Incorrectly Flagged Leveraged Lending (LL) Borrowers ............................................................... 57

Obligor Name Change .................................................................................................................. 57

Expectations and Common Issues for Base Case Projections ...................................................... 57

Additional CFWS for Analytical Purposes - Full CFWS .................................................................. 58

Data Input Tab Instructions - Full CFWS ....................................................................................... 58

Comments and Clarification ..................................................................................................... 59

Revenue / EBITDA ..................................................................................................................... 59

Debt .......................................................................................................................................... 61

Changes in non-cash Working Capital (WC) Assets .................................................................. 62

Cash Flow Needs ....................................................................................................................... 63

Capital Expenditure (CAPEX) .................................................................................................... 64

Free Cash Flow (FCF) ................................................................................................................. 65

Liquidity .................................................................................................................................... 65

Comments and Clarification (Examiner Notes) - Columns ....................................................... 66

1Q 2020 Exam

EBITDA Adjustments by Categories .......................................................................................... 67

Data Summary Tab Instructions - Full CFWS ................................................................................ 69

Repayment Capacity Ratios ...................................................................................................... 69

Repayment Capacity ................................................................................................................. 71

Data Input Tab Instructions - Abbreviated CFWS ........................................................................ 72

Data Summary Tab Instructions - Abbreviated CFWS .................................................................. 73

Oil and Gas Cash Flow Job Aid ................................................................................. 74

Objective ...................................................................................................................................... 74

Procedures to Access and Save CFWS in SNCnet ......................................................................... 74

Data Input Instructions................................................................................................................. 74

Outstanding Bal Repayment Test Tab .......................................................................................... 75

Data from Bank Engineering Report ......................................................................................... 75

Repayment Test Section ........................................................................................................... 78

Repayment Analytics ................................................................................................................ 81

Full Commitment Repayment Test Tab........................................................................................ 83

Summary Results Tab ................................................................................................................... 83

Asset-Based Cash Burn Worksheet Job Aid ............................................................. 85

Objective ...................................................................................................................................... 85

Procedures to Access and Save the ABL CBWS in SNCnet ........................................................... 85

Data Input Tab Instructions .......................................................................................................... 85

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SNC Exam Line Card Documentation Job Aid This line card documentation job aid was developed to provide guidance to examiners and does not include all possible information and/or situations examiners may find during their file review. It includes helpful hints and reminders to assist examiners. Notes pertaining to ABL loans are included. All examiners participating in the SNC exam are required to complete the SNCnet training and take the completion check prior to the start of the exam. See the Appendix section at the end of the job aid, for online training listing available via SNCnet. Clicking on your name in the ribbon at the top of the home page will display all of the roles you have been assigned in SNCnet.

Help Documents

There are embedded help documents in SNCnet which are located in the Help section; found in the upper right hand corner, above the logout.

The screen below appears.

Helpful Tips

You cannot use an Excel or Word table and copy it to SNCnet as their format is not retained when line card is printed. • To create tables in Word, tab over to create spaces. When you copy and paste this over to SNCnet, you need to

paste special (paste as plain text). • By using tabs in Word when you paste it as noted above, the system will recognize the tabs as spaces and chart

format is retained. You can attach files to SNCnet. When attaching documents only include relevant information; e.g. do not attach the entire 10-K only pertinent pages used to support your analysis.

Click on “Help”

Last Name, First Name & Respective Agency

To alphabetize help documents, click arrow.

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If you lose your connection do not close your internet browser; as you will severe the connection to the data as well. If you do not close the browser you will be able to retrieve unsaved work, when internet connectivity is regained. You must logout each day to sever the connection and reduce opportunity for hackers! Due to time limitations OCC and FDIC team members are to log out at lunch time; if not done the system will cut off after 7 hours and 45 minutes. If the same loan was reviewed at a previous exam, the prior year’s line card is accessible to review to determine if information is applicable. To locate a previous line card, you will find “Reports” in the upper right hand side of the line card pages, just below the last tab (signoff) you will find “Reports” click on 1. Reports then 2. View History. Before carrying forward any information from a prior line card, be sure that it remains valid and the information is needed to support the risk ratings and conclusions at the current exam.

When you complete your Line card you MUST run a validation report and correct ALL ERRORS; WARNINGS do not need to be cleared. To run the validation report in the upper right hand side just below the last tab (signoff) you will find “Reports” click on 1. Reports then 3. Validation Report. Line card Attachments

PowerPoint documents cannot be attached, thus convert to pdf to attach. Recognize each firm has differing file names; however, below is “general” documentation which should be attached to support your assessment. You are to classify attachments appropriately as shown below.

Bank Provided Documents Public Documents Examiner Created Approval /Underwriting Document 10-K Cash Flow Worksheet, if create additional

worksheet to support analysis Annual Review 10-Q Documents created to support analysis Closing Memo Third party rating

agency reports Bank email responses to examiner questions (if lengthy)

Fee letter, if applicable Projections Credit Agreements / Amendments Covenant Compliance Certificates Latest Borrowing Base Certificate Problem Loan / Workout Plan TDR analysis document, if not included in approval /underwriting

Nonaccrual or Return to Accrual analysis document, if not included in approval /underwriting

1. Click down arrow in

2. Click on “View History”

3. Click on “Validation

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Line card Documentation Objectives

• Line card documentation needs to be sufficient to tell the story and support examiner conclusions, and be concise, clear and complete.

• Write ups are generally no more than three paragraphs and approximately 10 sentences. Focus on understanding and concisely supporting assessments of the key risk drivers starting with the primary source of repayment. Understand it and you have a much better understanding of the other drivers. For instance the value of a company or the value of a piece of real estate is driven by the ability of the combination of business, industry and human elements to generate free cash flow or net operating income. Liquidity is driven by excess cash or cash needs not supported by ongoing cash flow or new debt.

• This job aid attempts to provide a comprehensive set of potential considerations for examiners evaluating credit quality of SNC loans. Its length should not be considered a reflection of the expectations for linecard comments’ lengths.

• Copying information directly from bank documents is usually not desired or helpful as the documents represent banker opinions, not facts. When copying information verbatim, ensure that appropriate quotation marks are included and that a reason for including the information is provided.

• Examiners cannot copy Excel files or Word tables into the line card. While they appear correct when viewing the Line card the chart format is lost when printing.

• Examiners are encouraged to include source document name and page # as references in their analysis to assist subsequent voters and others viewing the line card, including team leader (TL), quality assurance (QA) and examiner in charge (EIC).

Review Bank/Obligor

The Review Bank section is used by the SNC office, and only contains the review bank name and RSSD number. You will not be updating the review bank section of this tab. However, examiners need to verify that NAICS code is appropriate.

Background Topics / Headings to include • Deal Structure • Company Information • Business Operations • Competition/ Industry Position • 3rd party rating agency information

See below for additional information

NAICS description Need to verify

Resource: www.naics.com/search it’s a great tool!

• NAICS link is also located in the help section useful link tab

If it’s incorrect, discuss with onsite team leadership to change.

Drop down choices Other Actions:

Change Obligor Change Review Bank Check Spelling

Reports: Validation Report View Previous Line card Line card Report

SNC Exam Line Card Documentation Job Aid

http://www.naics.com/search

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If the same loan was reviewed in the previous year, the prior year’s line card is accessible to review to determine if information is applicable and can be used. Prior line card is found in reports, view history as discussed on above. Background Background section information is to be in a concise summary format; charts and bullet formats may assist in clearly summarizing in a concise presentation. Information included in this section is used to assess the reasonableness of the projections that are discussed in the financial analysis tab. Financial Analysis is not to be included here. It is critical that examiners understand the borrower’s business operations, strategy and understanding the respective industry as it is crucial to analyzing historical and more importantly projections. If examiners cannot assess the business operations, strategy and/ or industry from bank provided information, discuss with exam team leadership. A discussion with bank management may be needed. Below bullets are representative of most aspects to be considered in this section. However, they are not all inclusive, nor are all applicable to every borrower. Deal Structure

• Include a brief description of the tranches; refinance information (does this replace old debt?); strategy and purpose. Include capital structure.

• Incremental facilities are to be included and in the transaction structure key risk driver discussion.  If incremental facility is used and not agented by the agent bank under review, the bank or nonbank

agent on the incremental transaction is to be included. • An easy way to capture is in chart format with bullets summarizing pertinent information. • If debt was restructured, summarize the restructure including timeline, terms, who participated and any

concessions (bank and borrower) if applicable. Include bank rationale for TDR designation (e.g. concessions, evidence of financial distress.)

• If the borrower’s credit facility is adversely rated and there has been a restructure that has bank directed improvements, the improvements should be clearly documented in the approval. Bank directed improvements would be considered evidence of a risk mitigation strategy for a non-pass loan not in workout status.

• Substandard or worse rated loans are generally considered in workout status. Company Information

• Include the following: structure, sponsors, principal business and markets. • If sponsor has recently supported other investments when issues have arisen, include description.

Business Operations

• Identify primary sources of revenue; suppliers/customers noting concentrations. • Borrower’s respective market share?

 Strengths/weakness of borrower? What’s their competitive advantage? • Where is the obligor in the business cycle? Infancy, growth, maturity

 If growth, what is driving it and is it sustainable? • What has been the borrower’s ability to adjust for changes in their business? • What are the key business risks? • What is the borrower’s strategic (business) plan, considering their operations, industry and economic

environment, how achievable? Is the business plan realistic? Ensure comments are consistent with conclusions drawn in the Financial Analysis section.

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Competition/Position within Industry

• Borrower’s competitors and their respective market share? • Strengths/weakness of their competitors? • Where is the industry in the business cycle? Infancy, growth, maturity • Barriers to entry: prohibitive/easy? • Any regulatory considerations? • Discuss both historical, forward looking and trends.

Third Party Ratings Summarize third party agency information include all ratings assigned, trend and outlook.

Co-Obligors

Sponsors

Internal Rating

Internal Ratings

• If the rating has changed since the bank submitted their data the rating and date assigned MUST be updated to the effective date.

• If the firm carries its position in a held for sale (HFS), trading account (TA), or as a successor agent (SA) report the obligor rating.  If the obligor rating is not available, the firm is to report as Lowest Rated Pass. Let TL or EIC know if this

is not the case.

Internal Rating Provided by the bank • Update if the rating changed from data

submitted or • If examiner concludes criticized / classified

rating, update rating date assigned to most recent.

Co-Obligors may be applicable and not included, examiners may need to add. • Credit agreement is a good resource for this

information

Sponsors This is to be completed when applicable. The approval document is a good resource for this information

SNC Exam Line Card Documentation Job Aid

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Credit Facilities

The credit facilities tab is one tab; however shown below in several sections for instructional purposes. If the same loan was reviewed in the previous year, the prior year’s line card is accessible to review to determine if information is applicable and can be used. Prior line card is found in reports, view history as discussed above. Examiners need to verify that pre-populated information is correct and current.

• Review to ensure funded exposure amount is only the outstanding debt balance.  Banks have reported “utilized” amount, this includes issued and undrawn letters of credit which are

contingent liabilities and reported on CALL report Schedule L.  If bank is reporting “utilized” discuss with exam team leadership for corrective action.

We have found that Banks reporting for RC “funded exposure” differs; it may or may not include issued and undrawn letters of credit. If SNCnet’s “funded exposure” amount includes issued and undrawn letters of credit, examiners are to detail the amount of issued and undrawn letters of credit included in the Detailed Repayment Terms box. Examiners also need to make sure that the bank projections used to complete the LL CFWS only includes outstanding debt in the respective line (LLCFWS row 36.)

Committed Global and Funded Exposures • Update facility committed exposure if it has changed • Validate that the bank reported committed and funded

exposures in US dollars for foreign currency debt. Firms should only include outstanding balance in funded exposure. • Review to ensure bank is NOT including issued and

unfunded letters of as credit exposure. Banks may refer to this as “utilized” amount. If so, advise onsite exam team leadership of issue and correct to reflect as of date’s outstanding RC balance.

Internal Credit ID EIC, Admin, Location EIC and Team Leaders have the ability to update

Drop down choices Other Actions: View Reported Data Move Credit Delete Credit Add New Credit Clone Credit Extract Participants Upload Participants View Appeal Requests Check Spelling Reports: Validation Report View Previous Line card Line card Report

SNC Exam Line Card Documentation Job Aid

Origination Date Date of the respective credit agreement. • For renewals or modifications that are executed via an

amendment, the origination date is that of the credit agreement NOT the amendment document.

• For renewals or modifications that are executed via an amended and restated credit agreement, the origination date is the date of this agreement NOT the original credit agreement.

• For incremental facilities the origination date is the same as the governing credit agreement; i.e. either the original credit agreement date or the amended and restated credit agreement whichever is applicable.

1Q 2020 Exam Page 11 of 87

Payment Schedule and Detailed Repayment Schedule

Complete the Primary and Secondary Sources of Repayment; this information flows to the write-up

• When selecting the repayment source ensure selection is the appropriate source for the respective credit facility. Example:  Seasonal or ABL Line of credits’ repayment source would be conversion of WC not CF from operations.  CF from operations would be appropriate for TL and permanent WC.

Payment schedule box MUST BE COMPLETED using APPROVED WRITE-UP ABBREVIATIONS which are found in SNCnet help. This information flows to the write-up. RC example: TL example (1% amortization annual) Qtrly Int, principal at maturity Qtrly Int + $500MM principal or

Qtrly Int + 0.25% principal (if paid quarterly) Note: show information using the same frequency. Calculate the quarterly principal amount; don’t show Qtrly Int + 1% amortization.

Detailed Repayment Schedule • This section is to include details of the payment

schedule; see discussion below.

Bank Identified Leveraged Lending – Bank Reported Data “Yes” indicates the credit meets the reporting bank’s internal definition of leveraged lending. This is not to be changed by Examiners without consulting the SNC office.

Payment Schedule • Concise summary of payment schedule • Information flows to the write-up; thus MUST use SNC approved

abbreviations which is located in the help section document name “Abbreviations - SNC Write-up”

TDR Flag – Bank Reported Data “Yes” indicates the credit is a bank reported Trouble Debt

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Detailed Repayment Terms box include the details of the

• pricing • fees • regular principal payments including excess cash flow (ECF) recapture • other mandatory principal reductions • excess cash flow (ECF) provisions are mandatory only if the negotiated calculation is met. Examiners should

summarize the leverage condition for such payments, indicated if a testing period has occurred and if so whether payment was required. If required was payment received. Example below.

Annual excess cash flow recapture (ECF) begins 12/31/2018; required payment based on net 1st lien leverage ratio

ECF Leverage Ratio 50% > 3.0 25 > 2.5 and < 3.0 0 < 2.5

Note: Examiners are to include pertinent repayment terms for borrower being reviewed. This information is to be considered when assessing transaction structure.

Ratings

Bank Accrual Status – Bank Reported This is to be bank reported information. Examiner decision, if applicable, is completed on voter rating tab.

Internal Rating • Insert the most recent internal rating

which bank may have changed after the data was submitted.

• If you update the rating you MUST update the effective date.

If the bank did not change their internal rating the effective date ONLY needs to be updated for criticized/classified credits. • Update the effective date to the most

recent quarter end date.

Participant Ratings This section reflects other participant internal ratings reported to the SNC Business office. The bank’s top holder will be shown in the respective column. The rating information is confidential; therefore it is NOT to be shared or discussed with the Agent bank in any format (e.g. you cannot tell the agent “other banks rate this differently.”

SNC Exam Line Card Documentation Job Aid

1st testing period: 12/31/2018 compliance certificate calculation did not require payment.

1Q 2020 Exam Page 13 of 87

Lender Protection

The lender protection tab is one tab; however shown below in several sections for instructional purposes. The primary purpose of this tab is to:

• Identify repayment sources independent from the borrower. • Confirm the borrowing legal entity and guarantors in the credit agreement to ensure full understanding of

primary and secondary repayment sources. • Guarantors include other legal entities in the borrowing entity corporate structure, individuals and other legal

vehicles such as a trust and may be conditional and less than 100% or specific such as guaranty of payment only. Describe and indicate the value of secondary sources of repayment (guarantors, real estate, balance sheet assets, and enterprise value) and the usefulness of loan covenants. Examiner conclusions of the topics discussed in this tab will be documented in the secondary source of repayment key risk driver on the Financial Analysis tab.

Participant This section reflects all participants reported by the agent bank. Click + sign to expand to review.

Other Actions Reports Add Guarantor Validation Report Add Collateral View Previous Linecard Add Covenant Line card Report Check Spelling

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Guarantors

If the borrower has a lot of subsidiary guarantors summarize in one guarantor box/entry do not enter each individually. • Example:

 Guarantor box: “Subsidiaries”  Guarantor comment: “All current & future wholly owned US subsidiaries”

Guarantor Comments For Third Party Guarantors: • Describe the value of this guarantee as a secondary source of loan repayment. • Provide a brief summary of capacity and liquidity. • Focus on guarantor’s capacity and willingness to repay the loan.

 If support has been demonstrated provide example  If unlikely the guarantor will have the financial capacity to support, it

should be stated. • Describe the details if there IS a material corporate affiliate NOT guaranteeing

the loan. • Information included if applicable, expiration date and any conditions.

Left Column For Third Party Guarantors: • Guarantor: parent, subsidiaries and affiliates • Select “Full”, “Limited” or “Conditional” as the Type of

Guarantor  Limited - enter dollar amount covered  Unlimited - leave guarantee amount and comments

section blank  Conditional - not enforceable immediately, some

contingency must occur

Right Column For Third Party Guarantors: • Date on the guarantee agreement

Remember to apply guarantors to all applicable credit facility or facilities. (Common error)

Guaranty Amount Enter amount in dollars

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Sponsors, Guarantors, or Owners: May provide additional capital support. Evaluate willingness and capacity to assess adequacy.

• If a written guarantee is provided to support the repayment of the loan, is it reliable and enforceable?  Nature of guaranty – individual or legal entity?  Limited / unlimited?  Conditional / unconditional?

• Financial capacity and willingness of the guarantor or owner needs to be evaluated, including global CF analysis as appropriate. The evaluation should be well supported in the bank’s loan file documentation.

• Sponsors typically do not guaranty. It’s a business investment. Their willingness to support is typically based on its prior track record of demonstrated support. Capacity to support is typically not a consideration unless formally required under the terms of the credit agreement.

• Does historical support ensure future support? Not necessarily. What were and what are the sponsors’ current incentives to put more money in the company?

Collateral Provide a concise summary / description. Include valuation summary including appraisal date. Below is information for different types:

• ABL: collateral eligibility requirements, advance rates, etc. Summarize most recent field exam audit and concerns.

• CRE: vacancy rates; rental rates; cap rates or discount rates, debt yield, etc. • Construction: % complete vs. % advanced, including changing orders; obligor equity investment, interest

reserves terms and availability, etc. • Energy: Borrowing base for reserve based loans should be completed semi-annually with the most recent

completed in the spring. Borrowing base reports submitted should be reviewed by qualified independent bank personnel.

Balance Sheet Collateral: The Net Orderly Liquidation Value (NOLV) of Assets is normally considered a source of repayment when continuation as a going concern is questionable. Asset valuations are needed in these type scenarios to assess adequacy. For deteriorating credits, the bank should have a well-developed asset liquidation scenario. Some points to consider are:

• Loan agreement collateral provisions / controls • Priority lien status • Tangible asset valuation:

 Independently prepared or assessed  Do the valuations consider the specialty or perishable nature of the collateral?

• Intangible assets (trademarks, patents, names, licenses) and consider salability of the asset(s) • Controls over cash and collateral proceeds

For Real Estate include: • Good description of the physical property • Current projected performance (i.e., vacancy rates, rent levels, concessions) • Your evaluation of the appraisal (e.g., prepared by an independent source, current enough to appropriately

reflect R/E conditions in the area)

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Covenants The purpose of this section is to present information necessary to determine the effectiveness of covenants relative to a borrower’s credit risk. Credit agreement typically includes financial, affirmative and negative covenants and bank’s loan approval and monitoring documents should provide more concise assessments.

1. Financial covenants examiners should add a separate covenant (“Other Actions” select “Add Covenant” see page 13.)

2. Affirmative (i.e. reporting) and Negative (cash leakage) covenants examiners should summarize the respective significant components.

Leveraged Finance Loans • Dollar Amount = NA, unless there are significant

tangible assets; e.g. Mining company collateral. • If collateral value is applicable, enter in dollars.

Collateral Comments • Describe what the collateral consists of and how much it

will reduce the debt if necessary. • If in your opinion, the collateral is outdated or has limited

resale, this should be stated (e.g., machinery)

Covenant Comments • Discuss covenant compliance violations and waivers. • List the financial covenant requirements, and the company’s actual

performance.  Example: Max Debt to Capital = 30%; at 12-31-2012 actual is

12.8%. • Put ratios into context of the borrower’s loan structure. • Provide an opinion on the usefulness and/or meaningfulness of the

covenants.

Remember to apply collateral to all applicable credit facility or facilities. (Common error)

Remember to apply covenants to all applicable credit facility or facilities. (Common error)

Summarize: examples “1st lien leverage ratio”; “Affirmative”; “Negative”

If it’s a springing covenant and it’s not yet sprung, select “Not Yet Tested”

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Discuss covenant compliance violations and waivers.

List the financial covenant requirements, and the company’s actual performance (if applicable.)

• If covenant requires cash be netted against debt, show both; however, note in credit administration section (Management tab) as a weakness.

• Summarize negative covenant which are pertinent to cash outflows.

Negative covenants: i.e. restricted payments (“cash leakage”) permit a company to pay dividends or distributions before making payments on the loans, potentially impacting the ability of the company to service its debt and repay the lenders.

Example of weak structure or covenants

• Borrower can sell fixed assets without lender approval and without paying down the loan • Borrower can pay dividends or buy back common stock without lender approval and without paying down the

loan • Covenants with excessive headroom (greater than 25% as a guide) • Borrower can change principal line of business without lender approval and without paying down the loan • Inappropriate EBITDA add-backs (i.e., cost savings that have not yet occurred) • Structure includes a deferred cash Payment in Kind (PIK) feature

Enterprise Valuation (EntV) This section is the agent bank’s EntV estimate which is not shared with participants. Each participant bank should be completing its own EntV analysis. Note: If relying on Enterprise value the collateral valuation should not be applicable.

Enterprise Valuation Comments • Discuss how EntV was derived and whether you believe the assumptions were

reasonable. • Are the EntV assumptions documented and well supported? If not, ensure that

communications with the bank evidence examiner inquiry (effective challenge.) • Has the EntV been prepared by an independent party? Does the bank

documentation include a discussion about the reasonableness of the value (demonstrating an effective internal challenge of results?)

• Discuss whether the company’s comparables makes sense. • Provide your opinion on whether the EntV should be used or discounted and why.

SNC Exam Line Card Documentation Job Aid

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For situations where examiners do not want the Enterprise Value to appear in the write-up complete the following.

Enterprise value section after the above steps are completed is below.

SNC Exam Line Card Documentation Job Aid

Step 2: Click “Enterprise Valuation Not Provided”; the items noted in step 1 will be removed.

Step 1: Enter the following information in the comment box below. a. Enterprise Valuation Source b. Enterprise Valuation c. Enterprise Valuation Date

1Q 2020 Exam Page 19 of 87

EntV is NOT collateral. It’s a static view and will change based on various factors (e.g. borrower’s financial performance, industry.) It is used to estimate the market value of the business as a going concern and/or the ability to restructure.

For leveraged finance credits, Enterprise Value is often used to estimate the market value of the business and/or ability to refinance. Enterprise Value is a theoretical takeover price based on cash flow and market based assumptions.

Examiners should review EntV methodology to assess adequacy.

• Understand the calculation and use of Enterprise Value • EntV is viewed as a secondary source of repayment when the value is well supported • Three approaches to valuation:

 Income: determines value by calculating the net present value of a stream of free cash flow generated by the business.

 Assets: determines value by adding the sum of the parts of the business, less liabilities (net asset value).  Market: derive value multiples from comparable company data or sales transactions. For a public

company, EntV = Market Value of Equity + Debt – Cash & Cash Equivalents. • Was there a stressed EntV completed? If not, note that the bank did not perform it. If so, note value and look

to see if it covers the entire debt structure. Consider the stress factors in relation to the current obligor situation, specific risk factors, and industry outlook. Are they reasonable and well supported? How was it factored in credit quality assessments?

The final value estimates should be based on the method(s) that give supportable and credible results. Assumptions and rationale underlying the final EntV should be clearly documented and well supported, and appropriate for the company’s industry and financial condition. Key items: EntV are performed by qualified independent (of the loan process) and credible individuals or groups.

These methods of valuation and written support for final value estimates are standard practice for leveraged loans and the principles apply to non-leveraged credit that is reliant on company sale value as a secondary source of repayment. For non-leveraged credit of this type, discuss expectations for the documentation and support for value with your team leader and/or EIC.

Financial Analysis

The financial analysis tab is one tab; however shown below in several sections for instructional purposes.

Other Actions Reports Add Cash Flow Worksheet Validation Report Remove Cash Flow Worksheet View Previous Line card Checking Spelling Line card Report

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Procedures to Access and Save CFWS in SNCnet (when applicable) These procedures are discussed in the CFWS section of this job aid.

Should the LL CFWS not automatically be available (i.e. not reported as LL) or examiner needs the LL CFWS for additional analysis the only step that is different from those discussed in the CFWS section is below.

1. Examiners need to ask exam leadership (EIC / Team Leaders) to complete the following: go to “other actions”

a. Chose “add cash flow worksheet” b. Worksheet name chose “LL Cash Flow Worksheet” c. Reason for adding chose “CFW should have been applied” for incorrect agent bank reporting or “CFWS

used for analytical purposes only”

NOTE: Examiners should only upload ONE LL CFWS, Do NOT upload both Full and Abbreviated CFWS versions. The financial analysis is often the most important factor determining supervisory risk rating.

• Focus on describing and analyzing the financial metrics (level and trend) that determined your rating recommendation. Examiners should ensure that the root causes for changes in financial performance are identified, understood and concisely discussed in examiner comments.

• When indicating revenue trends, include the annual revenue numbers used. Note the source document name and page # to assist subsequent reviewers.  Example: “Revenues for 2012 declined by 10% to $9MM, as compared with $10MM in 2011.” Page 10 of

2012 10K and page 11 pf 2011 10K. • If all of the risk drivers do not apply, address the risks associated with the loan, i.e. CRE loan, to understand the

borrower’s performance.

Step 1 a.

Step 1 b.

Step 1 c.

Step 1

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Leveraged Finance (LF)

Follow the interagency format which focuses on seven key risk drivers. • Conclusion should be the last section written. Start your conclusion (satisfactory, moderate or weak) and support

it in a concise way. Focus on key credit quality metrics and business circumstances that affect them. • The leverage lending cash flow worksheet (LL CFWS) computes all the key financial ratios, see the CFWS of this job

aid for further information. If not completing a CFWS, use and assess the information provided by the Agent bank’s repayment model.

• Evaluate each risk driver and provide supporting metrics. • Include facts that support the rating. • Include your analysis and opinion on the impact of the metrics. • Provide performance information. • The impact of the asset liquidity level.

Conclusion The conclusion section should be completed last.

The conclusion is a high level summary of key concerns and root causes for the level and trend of financial performance observed and reasonableness of projections, if applicable. You should use this section to emphasize, not copy, the key financial conditions from your individual risk driver assessments. You do not need to cover every risk driver, just the most important factors affecting financial condition and credit quality. This assessment and individual risk driver assessments should tie to your support for voter rating, but DO NOT INCLUDE AN OPINION ON THE FACILITY / OBLIGOR RISK RATING IN THIS SECTION.

Conclusion Financial Analysis Comments Each of the Key Risk Drivers is specific while the conclusion box is used to summarize the broad or big picture items / issues.

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Repayment Capacity from Primary Source

PSOR is dependent on qualitative factors which are to be discussed in the Review Bank / Obligor tab background section. When assessing PSOR examiner should include pertinent quantitative factors which impacts or has the potential to impact repayment ability. When the debt structure requires little or no principal repayment, repayment capacity calculations should be over a reasonable repayment period for leveraged loans, generally 5-7 years. Examiner comments should include repayment capacity, FCC ratios and rationale and/or concerns with projections / assumptions.

The risk rating of leveraged and other cash flow loans involves the use of realistic repayment assumptions to determine a borrower’s ability to de-lever to a sustainable level within a reasonable period of time. Realistic repayment calculations require well supported assumptions about future cash earnings. If bank repayment calculations are not well supported examiners should develop their own repayment calculations and/or require the bank to re-calculate repayment metrics using well supported assumptions. This requires judgement on both sides and voters should consult with team leaders and/or EICs throughout the process of assessing adequacy of repayment metrics.

To calculate a borrower’s CF leverage, Adjusted EBITDA is used as a proxy for CF. Since EBITDA is a more consistent measure of earnings power, it provides for a better comparison of leverage across industry peers.

When borrower uses significant operating leases to finance assets, EBITDAR should be used in place of EBITDA. Additionally, total debt needs to be increased by the present value of future lease payments. As a rule of thumb, examiners can multiply current lease payment x 8, as a proxy for the present value.

If not using the CFWS, include the ratios and the numbers used to calculate ratios (e.g. FCC) to assist the other voters. If using covenant defined information, note as such; i.e. covenant defined EBITDA.

For interest coverage calculations, examiners should include deferred PIK interest when assessing repayment capacity. Typically interest coverage is calculated both with and without PIK for comparison. For PIK equity deferred dividend payments consult with your team leader and/or EIC on how to factor into cash flow calculations and overall credit quality assessment.

Ensure to include ALL appropriate analysis for all facilities repayment sources: • If structure includes seasonal RC facility then

comments should include WC assets analysis. • For ABL structure, ABL CF worksheet is to be

attached to the Line card and analysis included.

Repayment Capacity from Primary Sources Understand the borrower’s primary repayment source. Elements to consider for this assessment:

• Past operating performance, • Industry /economy versus borrower’s strategy, (Detailed in Review Bank / Obligor tab

Background section discussion), • Analyze key cash flow drivers to achieve future operating performance, • Cash flow sources versus cash flow uses.

See below for additional factors to consider in analyzing.

Chose: Satisfactory, Marginal or Weak

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Review past operating performance if applicable and use the assessment to support assessment of future cash flow. Analyze key cash flow drivers such as operating performance, performance sales, margins and commodity expenses. Identify and assess the variable and controllability of the drivers, e.g. are commodity expenses hedged, do costs have a fixed component, etc.

If borrower is not currently performing and future cash flow estimates rely heavily on increases driven by estimates of the impact of recent changes in personnel or business strategy, recent performance should weigh heavily in the determination of a regulatory rating. For example if current financial performance shows an inability to cover fixed charges that facility or facilities would generally be considered to have a well-defined weakness, and repayment capacity estimates should be more reflective of current performance until a track record is established, generally over 12 months.

• Cash flow sources vs. cash flow needs. • Recurring vs. one-time, i.e. assets sales, reliance on revenue growth or expansion which substantially exceeds

historical levels, account for recurring charges - capex, taxes, and mandatory dividends. • If deal does not have projections, is the basis for not obtaining them reasonable? If not note this on

management tab as a credit risk management issue.

Factors to consider are:

Sources:

• Free cash flow vs. EBITDA or adjusted EBITDA • Recurring, stable, volatile • Reliance on asset sales • Reliance on revenue growth or expansion which substantially exceeds historical levels • Margin Expansion

Uses:

• Account for recurring charges – (i.e., WC, CAPEX, taxes, leases, mandatory dividends)

Cash Flow Formulas

• EBITDA: Net Income + Interest Expense + Tax Expense + Depreciation and Amortization Expense or

Income from Operations + Depreciation and Amortization • Adjusted EBITDA: Add-backs to EBITDA may include acquisition and integration expenses deemed to be “one

off” in nature such as store closing costs, severance pay, or other non-cash items.  Don’t just accept the numbers.  For items that do not meet the “one-Time” nature, exclude those items from your calculations and

document your rationale. Inform TL or EIC and the bank. • EBITDAR: EBITDA + Rent Expense (include if significant) • Free Cash Flow (FCF): Net Cash Provided by Operating Activities – CAPEX • Proxy FCF: Adjusted EBITDA - CAPEX – Cash Interest Paid – Cash Taxes Paid + Changes in non-cash WC

Understand revenue sources; if the borrower has overseas operations assess foreign exchange and country risk (ICERC) may be applicable, although only a small number of countries or origin would result in a worse rating. Also is there evidence in the borrower’s file of the bank’s internal risk monitoring for the above? If not, note in the management tab as a credit risk management issue and discuss with respective regulatory team members.

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To measure the repayment capacity of a borrower’s CF, the following financial ratios are used:

• Cash Interest Coverage Ratio: Adjusted EBITDA / Cash Interest Paid • Interest Coverage Ratio: Adj. EBITDA / (Cash Interest Paid + PIK, if applicable) • Debt Service Coverage Ratio: Adj. EBITDA / (Cash Interest Paid + STD + CMLTD) • Fixed Charge Coverage: Adj. EBITDA / Fixed Charges • Fixed Charges include: CAPEX, interest paid, PIK interest, taxes paid, (STD + CMLTD), and any mandatory

preferred dividends. • Fixed Charge Coverage (including leases): Adj. EBITDAR / (Fixed Charges + Rent Expense). Same Fixed Charges

listed above plus rent expense

Important Note: For PIK interest see LL CFWS job aid for additional information.

Debt Servicing versus Debt Repayment

• The above ratios speak to the ability of a borrower to make the scheduled interest and principal payments. • The interest coverage ratio demonstrates the ability of a borrower to make cash interest payments from cash

flow. • The debt service coverage ratio addresses the ability of the borrower to cover both interest and required

principal payments. • The fixed charge coverage ratio addresses the ability of the borrower to cover cash interest, required principal,

maintenance or actual CAPEX, changes to working capital and cash taxes. • None of these ratios demonstrate whether the borrower has sufficient FCF to repay the debt by its maturity.

Term debt that does not fully amortize and RC that is not periodically paid down need to be refinanced.

This concept is very important, particularly for leveraged finance transactions. Many leveraged finance transactions have little (1%) annual amortization. Therefore, their ability to service their debt may be acceptable, but their ability to repay their debt is poor, signaling the potential for a high degree of refinancing risk and a potential or well-defined weakness.

Repayment Capacity from Primary Sources

• Regulators expect the use of realistic repayment assumptions to determine a borrower’s ability to repay or in the case of leveraged loans, de-lever to a sustainable level within a reasonable period of time. When considering the reasonableness of the assumptions do they differ from historical performance or are not being realized in subsequent periods? Ensure that the Line card documents the discussion of these potential concerns with the bank (notes effective challenge.)

• If the projected capacity to pay down debt from cash flow is nominal with refinancing the only viable option, the credit may have a potential or well-defined weakness warranting and adverse risk rating even if it has been recently underwritten.

• To quantify the ability of a borrower to amortize debt, historic or projected FCF should be compared to both Senior Secured Debt and Total Debt.

• Remember, as with any type of financial projections, you should only use projected FCF if the assumptions used are considered to be reasonable and well supported.

Total Senior Secured Debt Cash Flow Leverage Ratio

Proxy FCF / Total Senior Secured Debt

Total Outstanding Debt Cash Flow Leverage Ratio

Proxy FCF / Total Outstanding Debt

• As a quick reminder, Proxy FCF = Adjusted EBITDA - CAPEX - Cash Interest Paid – Cash Taxes Paid + Change in Working Capital (excluding the change in cash)

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Assessment of 2nd Lien Debt

• The borrower’s potential to default or have potential or well-defined weaknesses is based on its ability to service all debt.

• There is no priority of payment for 2nd lien debt; only priority on collateral itself or net proceeds from sale of the company.

• The regulatory rating for a 2nd lien facility may differ from a first lien facility when the borrower exhibits well- defined weaknesses and credit quality is reliant on the secondary source of repayment.

Additional topics to consider

Pension Accounting

• Changes in the funded status in the current period are due to service cost and interest cost, and the expected return on plan assets may or may not cover these costs

• If the current period costs are greater than the expected return on plan assets, a liability for pension benefits is recorded

• The expected return on plan assets is compared to the actual return, adjusting other comprehensive income (OCI); if the actual return is less a pension liability is recorded

• A plan may have had adjustments in OCI for amortization related to transition costs upon initial application, prior service cost, and deferred taxes

Pension Cost Data

• Pay particular attention to interest costs and service costs • For public companies, footnotes will contain detailed information on pension accounting • Funded/unfunded pension accounts can be volatile • There should be analysis (in FS, notes, or management discussion and analysis – MD&A) of the pension impact

to EBITDA in a company’s analysis • Use your judgment as to whether it is reasonable • FX transactions and translation risk • Currency transaction risk: a company has transactions denominated in a foreign currency and these

transactions must be restated into the reporting currency equivalents (e.g., U.S. dollar) before they can be recorded. Gains or losses are recognized when a payment is made, or at any intervening balance sheet date

• Currency translation risk: occurs because the company has net assets, including equity investments, and liabilities “denominated” in a foreign currency

Foreign Exchange (FX)

FX Terminology

• Local currency: currency where the entity is physically located, but not necessarily where it operates • Functional currency: currency of the primary economic environment cash transaction by the entity in a stable

currency • Reporting currency: currency used to report financial statements of the parent company • Monetary assets and liabilities: e.g., cash, A/R, accounts payable, and LT debt, which amounts are fixed in terms

of units of currency e.g., contract, and settled on a future date • Nonmonetary assets and liabilities: e.g., inventory and property, plant, and equipment, do not require future

settlement

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FX Accounting Differences

Transactions not denominated in Functional Currency

• FX transactions may produce receivables or payables that are fixed in terms of the amount of FX that will be received or paid

• In general, settlement of FX denominated monetary assets and liabilities (not denominated in the functional currency) will vary and be recorded with current FX rates (between FX transaction currency and functional currency)

• Note that if the local currency is not the functional currency, monetary transactions are recorded at the current FX rates between local currency and functional currency

• These FX transactions have direct impact on an entity’s functional as well as the reporting (parent entity) cash flows

Evaluating FX Risk

• Where are cash flows coming from for repayment of the loan? • How much of the entity’s cash flows are impacted by FX transactions? If the local currency is the functional

currency, it does not impact the parent’s cash flows but if not, EBITDA may need to be adjusted • Does the company have net investment hedges against FX transactions to minimize the impact of FX

adjustments? • Are dividends up-streamed to the parent from the foreign sub each year? • Generally FX translation adjustments should not impact the EBITDA calculation • Look at FS, notes and MD&A sections of the FS for discussion

The LL CFWS is an assessment tool for repayment capacity and is required for all leveraged borrowers and is encouraged on all other CF loans. Refer to LL CFWS Job Aid for additional information.

Repayment Capacity from Secondary Source Provide a summation of support for all applicable secondary repayment sources, as the detail discussion/analysis is completed on the Lender Protection tab. Refer readers to the respective Lender Protection discussion for additional information.

Secondary repayment source include sale of business, business segment or company assets and sponsor support, guarantors, and maintenance agreement.

• Refinancing Risk is NOT to be discussed in this section as there is a separate key risk driver for this topic.

Repayment Capacity from Secondary Sources The secondary source of repayment may become the new primary source of repayment, when the primary source becomes inadequate. Recognition of the borrower’s distressed situation forces lenders to seek maximum recovery alternatives such as 1) sponsors, guarantors, owners and/or 2) balance sheet collateral and/or 3) enterprise value (EntV).

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Chose: Satisfactory, Marginal or Weak

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Performance to Plan Identify major assumptions used in the projections and determine how dependent repayment or refinancing is on meeting projections. Evaluate level of prior success in meeting projections. Review base and stressed scenarios and original projections vs. current outlook. Note: Budget is NOT the same as projections. If budget is provided comments regarding can be included as additive, it is not a replacement for assessing projections.

A one year budget isn’t an indication of performance to plan; thus a comparison to a multi-year projection should be the basis for assessment. The one year budget can provide insight into the ability to meet the near term years of the multi- year projections.

Review and discuss actual performance to original projections as well as revised projections. Borrower’s historical performance to plan should be discussed. If agent bank has not commented on this aspect it is a potential underwriting weakness. Note: Budgets are NOT projections.

Elements to consider for this assessment:

• Review original as well as revised projections for reasonableness  Are projections dependent on higher than historic sales growth?  Do projections rely on unrealistic cost savings and synergies?  Are updated projections inclusive of base (management) case and downside case?  Were the appropriate key drivers of the borrower’s business stressed?  Were updated projections timely completed as they should reflect current loan terms and all debt?  Do projections extend for the term of the loan?

o Ask loan officer if projections over life of loan are available o Cash flow worksheet will flat line last available projections over 5-7 year period

 Do projections include potential impact of higher interest rates?  Do projections include use of incremental facilities and/ or payment of dividends?

Focus on level and sustainability of key indicators and the sufficiency of repayment from these sources: Revenue, EBITDA, and FCF. Determine the adequacy of estimated future cash flow from primary sources (based on revenue and earnings trend and prospects) to repay debt assuming reasonable amortization on term loans.

Performance to Plan Compare and analyze borrower’s actual financial performance to original plan and updated/ revised projections. • Review original as well as revised projections for reasonableness. • Assess assumptions for consistency with the current economic and market environment (i.e. industry outlook). • Focus on level and sustainability of key indicators, and the sufficiency of repayment from these sources (actual

& projected) for revenue, EBITDA and free cash flow. • Review the adequacy of estimated future cash flow from primary sources (based on revenue and earnings trends

and prospects) to de-lever assuming reasonable amortization on term loans. Note: This may require the examiner to make assumptions about debt service requirements for those transactions underwritten to aggressive investor risk appetites. The CF worksheet will assist with this analysis.

Chose: Satisfactory, Marginal or Weak. The use of “Not Required” should be infrequent

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• Key point: A well-defined weakness in the borrower’s repayment and de-leveraging capacity likely exists when the borrower’s actual performance is well below projections.

• Ensure that examiner identified concerns are discussed with the bank and that the discussion is noted in the line card in the Management / Survey Tab, Discussions with Management area.

Leveraged Lending:

• Many leveraged loans were underwritten and engineered to just make regulatory hurdle for repayment capacity. Thus only moderate underperforming to plan would likely necessitate an adverse rating.

• If the projected capacity to pay down debt from CF is nominal with refinancing the only viable option, the credit will usually be adversely rated even if it has been recently underwritten.

Leverage

Incremental facilities are included in a leverage ratio in the LL CFWS to inform examiners on the potential increase in leverage from a non-cash generating use of funds. For key risk driver conclusion, it is generally most appropriate to rely on the leverage ratio without incremental facilities. Also examiners should view borrower leverage in light of their respective industry.

Liquidity

Leverage Risk Consider the entire capital and organization structure, not just bank and borrower debt. Understand the use of loan proceeds & impact on the capital structure:

1) Acquisition/merger, dividend recap, leveraged buyout? Purchase economics – did they over pay? 2) Consider equity from borrower or financial sponsor – does the sponsor historically dividend out their equity within

a short time? 3) Dependence on asset sales to repay debt? 4) Reliance on synergies to be achieved to meet the repayment plan? 5) Amount of equity from borrower or financial sponsor?

Determine if the borrower has significantly higher leverage relative to industry norms. Is repayment typically dependent upon increased revenue in future years? How much risk does this add to the ability to de-lever over a reasonable time period?

Borrower Liquidity Assess the overall level of the borrower’s liquidity risk. Elements to consider are:

1) Near term funding needs facing the borrower (e.g., working capital trends, short-term debt maturities

2) Company leverage/financial flexibility 3) Traditional and other sources of liquidity (e.g., sale of assets, IPO) 4) When applicable, springing covenants should be considered when assessing

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Chose: High, Moderate or Low

Chose: Satisfactory, Marginal or Weak

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Review ratio trends as it should not be a static view. Elements to consider: Borrower’s ability to improve future free cash flow by increasing revenue, improving margins, reducing capital expenditure and/or working capital requirements. NOTE: the CFWS Liquidity section available revolving credit includes issued and undrawn letters of credit on the facility.

Compare cash burn to balance sheet liquidity. Review unrestricted cash on balance sheet, marketable assets and unused revolving line of credit. Compare and apply to projections (current liabilities). Remember to consider how much cash is needed for day to day operations of the business. Determine Free Cash Flow (FCF). Reconcile Cash flows From Operations to EBITDA minus Cash Interest minus Cash Taxes plus/minus changes to working capital. Assessment horizon should include both near term <18 months and long term and evaluation of all liquidity sources. Examiners should assess all liquidity sources. Examples include:

• Unrestricted cash, unencumbered marketable securities /investments • Non-balance sheet sources of liquidity such as availability under revolving credit lines • Improved working capital management • Reduction in discretionary CAPEX • Sponsor or guarantor support • Sale of non-core assets, consistent with business strategy • Access to the equity markets (e.g., private placement or IPO) • Sale and leaseback transactions

Examiners should review:

• Working capital trend needs • Short term debt maturities • Contingent liabilities, such as pending litigation, recourse obligations, operating lease obligations, deferred taxes • Dividend distribution and/or stock repurchase plan

Is the borrower highly leveraged?

• If so, they may have limited financial flexibility and access to additional borrowing to support near term liquidity needs

• Additionally, all of their assets may already be pledged against existing borrowings • Covenants may exist, requiring a minimum cash balance or preventing additional borrowing • If not, do they have the ability to secure new financing, or sell unrestricted assets?

Traditional Balance Sheet liquidity measurement ratios

• Current Ratio: Current Assets / Current Liabilities • Quick Ratio: Cash & Equivalents + Marketable Securities + AR/CL • Cash Ratio: Cash and marketable securities / current liabilities • INV Turnover Ratio: Cost of goods sold / Average Inventory

Statement of Cash Flows liquidity measurement ratios:

• Cash Flow Coverage Ratio: Net OCF / Current Liabilities • Critical Needs Ratio: Net OCF + Interest Paid / CL + Interest • Cash Interest Ratio: Net OCF + Interest + Taxes / Annual Interest

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Management/ Surveys

Note: If there are no surveys so tab will reflect Management only If the borrower has been flagged for a survey, a survey will be included in the line card with “survey” in the management tab title. For questions where a single response is being sought, a “Clear” button will become available for that specific answer allowing the examiner to clear the response.

If the borrower has NOT been flagged for a survey, the tab will only show “Management”.

Account Officers: Remember to complete this information

Other Actions Add New Discussion

Check Spelling

Reports Validation Report View Previous Line card Line card Report

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Discussions with Management

Clearly document all discussions with officers and management including dates and attendees. If lengthy can attach meeting notes and reference in this section (provide document name in line card for early reference for subsequent reviews.) Discussions with management documentation are critical to record information obtained via emails or discussions for subsequent reviewers. • Examiners can copy email correspondence and include bank response or if lengthy, convert email to pdf,

summarize within the box and refer reader to attachment for details. Provide document name in summary within the box. If copying emails into this section, remove unnecessary header and footer information that is not needed to understand the nature of the contact.

• If meeting notes are taken during discussions with officers and typed, convert to pdf and complete the respective comment box as above. If above is not available, provide concise comments providing pertinent information discussed.

Discussions should be added when emails seeking clarification/questions are sent and when discussions occur with the account officer(s).

• There should be transparency of information being sought and responses so subsquent reviewers can follow/understand voters comments/conclusions.

• You can copy email questions and responses into the respective box or if it lengthy email or meeting notes you can conver to pdf attach to the line card, summarize above and refer to the attachment (inlcuding document name) for details.

Suggested format: Mangement discussion should be entered for email questions and meetings; suggest noting nature of discussion (information gathering; information clarification or rating discussion.)

• The management discussion with emailed questions examiners need to include bank response as well – similar to the above example.

• If lengthy emails examiners should save as pdf and attach to the Line card; create a management discussion, provide summary comments and refer to attachment file name convention of “Management Discussionxx.xx.xxxx.pdf.”

Discussions with Management • The name(s) of the principal banker(s) with whom you

talked • The primary issues discussed and any new information

that was provided • Document if loan officer was not able to answer certain

questions or if there are any disagreements

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Risk Management

Transaction Structure

Credit Administration & Risk Management Issues • Check to see if CRM issues from last year are applicable to this

credit, and if they are whether they have been corrected. • Describe any new weaknesses that you observed • Comment as to whether the lender appears to be monitoring the

credit properly.

Overall Risk Management Rating • Record important information not discussed within

one of Key Risk Drivers boxes below. • Each of the Key Risk Drivers is specific while the

Overall box is for broad or big picture items/issues. • If the EIC of the institution wants specific items

addressed regarding Overall Risk Management for each obligor, they will provide the voters details and the findings can be documented here.

Transaction Structure Consider if loan structure and covenants meet key purposes:

• protect repayment sources and collateral position, • influence strategy and send early warning signals, • determine rights to act and ensure legal enforceability (conditions precedent, events of default), • define lender and borrower positions and objectives, • provide adequate control over the borrower.

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Chose: Strong, Satisfactory, Marginal or Weak

Chose: Satisfactory, Marginal or Weak

1Q 2020 Exam Page 33 of 87

Consider the following:

• Loan structure • Debt tranches (classes and priorities), ABL, RLOC, Term, Term A, Term B, Bridge, Mezzanine. Consider

prioritization of cash flow/collateral. Also consider if the borrower’s structure itself has priority within the entity that affords the same type of protection that underwriting terms often provide (e.g., is the debt at the operating company level and structurally superior to debt at the holding company level.) Note limited amortization. Incremental facilities, debt baskets and side car arrangements should be considered as well.  Elements of Loan Structures

• Obligor position in the corporate organizational structure: (operating co. vs. holding co.) • Seniority of claim: (priority of loan tranches, senior vs. subordinated debt, guarantees) • Collateral protection/lien structure: (secured, second lien, or unsecured)

• EBITDA adjustment level. Discuss timing and support, particularly related to synergies, cost savings and optimization expenses.

• When applicable discuss restrictive payment and related control which should be summarized and considered by Examiner as part of transaction structure assessment.

Incremental Facilities An incremental facility provision in a loan agreement provides flexibility to a borrower to add additional debt, generally at the same seniority level as the original loan, with a sharing of collateral between existing and new incremental lenders.

Characteristics of an Incremental Facility

• May consist of immediately funded or delayed-draw term loans, or revolving credit commitments • May be implemented as either a new credit facility or as an upsizing of an existing credit facility

Uses of Incremental Facilities

• Financing acquisitions of business entities or assets • Increasing borrowing capacity to reflect the borrower’s growth / general corporate purposes • Refinance higher yield junior debt • Funding dividends or other distributions (i.e., a “Dividend Recap”)

Types of Incremental Facilities

• The fixed amount is usually the most straightforward component of the incremental facility and is typically known as a “fixed dollar basket”

• In some aggressive transactions, the fixed amount has become a “grower basket” allowing additional incremental debt above the fixed amount based upon the borrower’s consolidated adjusted EBITDA

• “Builder Baskets” (or “available amounts”) have a formula for defining amounts that can be built up (typically, up to 50% of net income) to be used for restricted payments such as dividends, investments and junior debt repayments.

• “Most Favored Nation” (MFN) is a provision that the existing lenders will be entitled to the same favorable terms (covenants and interest rates) as the new incremental lenders. Provision may also include an end date (sunset.)

Examiners should consider:

• Additional debt that may be incurred by the borrower via incremental facilities when assessing the leverage and transaction structure key risk rating drivers

• Both the likelihood of funding and purpose of the incremental facility in the risk assessment

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• Whether the credit agreement provides for an incremental facility incurrence test and, if so, is the test

reasonable  Are there negative covenants limiting total debt? If so, this should be included in the lender protection

tab - negative covenant discussion, consider here and refer to the lender protection tab for further information.

• Also consider: PIK and PIK toggle, delayed draws, flex pricing, cash flow recapture, original issue discount, interest rate floors, and amount of junior lien protection.

Incremental Facilities Challenge with providing guidance in this area is what needs to be included is dependent on the borrower’s incremental facilities based on their credit agreement. To assist Examiners’ comments at a minimum should address the following.

• Incremental facilities terms ($ amount, loan facility it’s tied to (RC/TL), include freebie amount, grower basket, and/or incurrence test amount, sunset period, MFN clause)  Was the facility approved at loan inception, or are additional approvals required, if so at what point?  Has the freebie basket been used and the amount re-established by the bank? If so summarize use and

rationale for its re-establishment.  Summarize the priority for usage of the incremental facility features, if applicable.

• How will it be advanced (lump sum, over period of time, other)  If structure has both freebie and incurrence amount; is there a requirement that one is used before the

other? • Does the credit agreement stipulate what the incremental facilities can be used to fund? If so include this

information. • Who can provide the incremental facility (existing lending group, other lenders outside of the current group)? • How the incremental facility is documented; was it in a summary document (credit summary or credit approval

memos) or did you have to go to the credit agreement, or some other legal agreement? Banks should document these components of the credit agreement in the approval and monitoring credit memos.

• Have incremental advances occurred? If so review incremental facilities document and comment on the following in summary comments  Has the agent bank changed?  Purpose of the advance?  Incremental facility been used and re-approved by the bank?

Loan Covenants  Are they meaningful? Do they provide appropriate control over the borrower? How much headroom exists

before the lenders can influence the company’s decisions; financial vs non-financial, incurrence/maintenance tests, springing liens, covenants that permit sale or exchange of collateral that served as the basis for the original underwriting or dilution of lender collateral coverage through additional debt or obligations to settle derivative contracts?  Loan Covenants:

• Covenants should be meaningful and provide appropriate control over the borrower • Act as an early warning signal • They should provide the lender the ability to act, to address deteriorating financial conditions or

adverse action on the part of the borrower

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 Covenant Types:

• Financial incurrence covenants: are only measured at the time of an event such as the incurrence of additional debt or an acquisition.

• Financial maintenance covenants: are measured continuously during the term of the loan, usually at the end of each quarter. They traditionally cover limitations on leverage and minimum interest coverage ratios. These covenants often define allowable add-backs to EBITDA.

• “Cov-lite” is defined as the absence of financial maintenance covenants. • Affirmative covenants: require a borrower and its subsidiaries to preserve their existence, hold

insurance, maintain their properties, and provide financial statements and projections over the life of the loan.

• Negative covenants: regulate the indebtedness and liens that a borrower and its subsidiaries may incur, the investments they may make, the assets they may sell, and the dividends and distributions they may make.

• Springing Covenants: It is also typical in cov-lite loan transactions for the financial maintenance covenants to be “springing” in nature. This means they will only apply to the RC facility if certain thresholds are met.

Key provisions in a credit agreement:

• Protect repayment sources and collateral position • Determine rights to act and ensure legal enforceability (conditions precedent, events of default) • Defines the lender and borrower rights and responsibilities

Example of weak structure or covenants:

• Borrower can sell fixed assets without lender approval and without paying down the loan. • Borrower can pay dividends or buy back common stock without lender approval and without paying down the

loan. • Covenants with excessive headroom (greater than 25% as a guide) This is from Fitch/S&P • Borrower can change principal line of business without lender approval and without paying down the loan. • EBITDA add-backs for cost savings or revenue increases that have not yet occurred. • Structure includes a PIK (Pay in Kind) or PIK Toggle.

Stress Testing / Sensitivity Analysis

Stress Testing/Sensitivity Analysis Has the bank conducted a sound sensitivity analysis of key assumptions and performance indicators? • Are updated projections inclusive of downside case, with

broad economic and borrower specific negative outcomes? • Do projections extend for the term of the loan?

SNC Exam Line Card Documentation Job Aid

Chose: Satisfactory, Marginal or Weak

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Additional elements to consider:

• Stress testing / sensitivity analysis should be commensurate with the financial performance of the borrower • What should be stressed?

 Revenue growth rates  EBITDA margins  Interest rates  Covenant breach  Cap ex if capital intensive business  Enterprise value (especially for SM and classified credits)

• How to evaluate the level of stress applied?  Borrower / management, base, and downside cases  Break even cash flow  Historical downturns

• Comments are to be substantive provide a conclusion and be supported. Are the idiosyncratic borrower risks being stressed?

Examiner comments are to include their opinion whether the stress testing was or wasn’t appropriate for the respective borrower and why. Comments are to include an assessment of how well the bank documented its consideration of stress testing in their credit decision.

Refinancing Risk

This is the risk that a borrower will not be able to refinance an existing loan at a future date under favorable terms. Review for the timing of when the debt has to be refinanced and does the borrower have time to address and improve prior to having to refinance. Also review for interest rate risk; is interest rate = current market rate?

Is the market willing to refinance borrower debt, consider market liquidity, pricing, reputational risk, industry risk, etc.?

To estimate the amount of refinancing available, apply current underwriting standards for similar loans to the borrower’s current or projected cash flow.

Refinance Risk • Consider market liquidity and cost to refinance - can the borrower afford the refinance terms

available? • Consider need to refinance - if there’s little need then the risk is likely to be low or moderate

under normal market conditions. • Identify the timing of the refinance event – how far out on the horizon? • If there’s a need to refinance is there a clear, identifiable refinance plan in place? Is it

realistic? • Are assumptions well supported? • Would current market conditions raise concerns with the ability of borrower to refinance

debt? • Assess the overall potential for refinancing the principal balance of a loan when it matures.

Chose: Low, Moderate, High

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What if borrower’s operating performance does not support the ability to provide repayment at reasonable market terms on debt maturities in the next twelve months? Is this a well-defined weakness?

Consider the following:

External factors that may add to refinancing risk:

• Investor base can be volatile and risk appetite can quickly change. • Borrower’s access to capital markets; pricing and terms • Banks periodically become reluctant to commit capital to the leveraged loan market or renew credit lines. • Banks may also pass the higher cost of regulation on to corporate borrowers.

Internal factors that may add to refinancing risk:

• High leverage and poor financial prospects • Timing of debt maturities vs. current recovery prospects • Exogenous impacts: declining industry, commodity prices

One overarching question is the debt maturities – what will the market look like or accept at that point? Thus how closely are the debt maturities? If within a year have a better idea of what the market will accept. If not, then unknown.

Also, if the borrower has recently been to the market and was able to obtain financing, inquire if it was oversubscribed as this provides some indication of market acceptance and ability to refinance in current market conditions.

Surveys

Surveys • The Management tab includes survey section when applicable and may include multiple

surveys. It will appear after the exam site EIC and/or National Coordinator has opted to create a survey for the institution

• Survey section purpose is to provide bank specific or multibank risk and/or risk management information to inform examination conclusions and messages to the banks.

• Examiners are required to respond to all questions in each survey which will entail either clicking a multiple choice button or populating a free form text box. Comments with the survey should agree with assessment in the respective line card section.

• Responses should be specific to the obligor being reviewed and include sufficient detail for the EIC or CPC to understand the severity of the issue. EICs will use the information captured in each survey to identify recurring/thematic issues specific to the review site.

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This section documents the discussions between the voting team and the individuals responsible for the quality review of the Line card (EICs, Location EICs, Team Leaders, Exam office and QA).

• QA is intended to inform efforts by the interagency leadership team to improve training and overall linecard quality. QA measures process effectiveness by reviewing the examiner’s linecard work product versus this job aid. In completing their assessments, QA reviewers should ensure that the examiners completing the line card have incorporated risk-based review principles regarding the level of detail needed to support their conclusions and ratings.

Quality Assurance Comments • Captures any dialogue between the individuals responsible for the quality

assurance review of the Line card and is meant to replace any discussions that used to happen outside of the SNCnet system, generally via email.

• Once comments are made, they cannot be edited. Additional comments can be added to an existing comment, but a saved comment cannot be changed.

Reports Validation Report View Previous Linecard Linecard Report

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Voter Ratings

The Voter Support for Voter Ratings is a condensation of the reasoning behind your ratings. It is the only section of the Line card that cannot be edited by others.

• The Voter Comments Section is for internal purposes. These comments are not distributed to the bankers.

Voter prerequisite needs to not show items open; if open you will not be able to complete your voting. Need to go address the open prerequisite then vote.

Credit reconciliation needs to be opened and updated. If you don’t do this, EIC will not be able to vote the credit.

Remember you must vote all facilities. If rating is the same for all facilities you can apply to all or if not applicable apply to the appropriate facilities.

If you are the first voter your comments can be brief in support of the assigned rating. Provide the top 3 items to support your rating. You don’t need to summarize the entire financial analysis numbers and trends.

Subsequent voters it is okay to agree with voter 1 and comments in respective voter comment box. However, you are to independently assess credit risk and at least document the key reasons for your agreement.

For classified credits you need to complete the accrual status. If there is not an event (i.e. bankruptcy, payment default) that precipitated NA, see your exam leadership and/ or consult your agency’s SNC manual.

Reports Validation Report Linecard Report

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Reminder: (Common Error) For classified credits you need to complete

• Accrual status • Treatment of future payments • TDR

Voter • The vote is populated by the voter.

Voting Prerequisites Any item showing here MUST be addressed before you can complete

Nonaccrual date: if there is not an event (i.e. bankruptcy, payment default) that precipitated NA, see your exam leadership and/or consult your agency’s SNC manual.

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Validation Report Linecard Report

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Voter comments should follow the format below. Examiners do not need to restate all information. Include summary information and pertinent financial information that supports conclusion. If PSOR is not satisfactory, it’s generally indicative of a criticized / classified credit.

Voter Support for Voter Ratings • Subsequent voters:

 If you are not voter 1, you should state in your first sentence whether you concur with voter 1.  If you are issuing a different rating, you will also need to state why your

rating is accurate. • The next sentences should include only the primary points that support your

rating. • Any additional information should include details that address the rating and

the primary points you just listed. In-depth details should not be included here as they are already addressed in other sections of the line card. Just two or three major facts with some minimal supporting metrics, indicating why the rating was assigned.

• Do not simply state “debt service coverage is adequate”; add the coverage number.

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Write-up

Purpose is to communicate risk ratings to the agent and participant banks, examiners using SNC results and other regulatory agencies. The write-ups must be accurate, concise and clear. Focus on the issues causing the heightened risk, impact of those risks on the borrower’s repayment ability, and the potential recovery of the lenders in event of default. For a loan placed on nonaccrual, the voter must also indicate if payments should be applied to principal or accrued on a cash basis. If a loan is restored to accrual status, the examiner should explain the reason(s) for this action in the write- up narrative and indicate the date the facility returned to accrual status. The discipline around this process has been developed to facilitate appropriate and effective communication, and ensure the maintenance of adequate program documentation. This section is only applicable to borrowers/facilities that are special mention or classified and does not need to be completed for pass credits. Examiners must use the approved abbreviations. You find the abbreviations on the write-up tab identified as “View Approved Write-up Abbreviations” or via the help section. As an outbound communication, ensure that the write-up uses proper sentence structure and punctuations. See the SNC manual for write-up examples. Reminders:

• If you are criticizing or classifying the facilities you need to get updated outstanding balance information and as of date and enter into credit facilities tab.

• Dates are written with dashes: i.e. 12-31-10 (this format xx-xx-xx is the approved abbreviation) • Be careful of quoting the agent bank or account officer as doing this or that. It is a syndicated deal and the bank

group is making the decisions. Thus use “The bank group decided…” • If TDR designation, the write-up is to state the concessions. All banks need to complete their own impairment

analysis. • The signed account officer acknowledgement form should be attached to the line card. • Verify and validate all information in the top header section and body of the write-up.

 Ensure nonaccrual status and date. Future payment applications, Trouble Debt Restructure are appropriate (not checked in error).

Common errors in SNC write-ups:

• Do not rate the Borrower/Obligor. Each write-up is for a single credit facility. You need to apply the write-up to the applicable facilities.

 Example of what NOT to do: “ABC Inc. is rated substandard.” • The write up should NOT include information regarding the supervisory rating, accrual status or TDR designation

of other credit facilities to the same borrower.  Example of what NOT to do: “These facilities are rated XXXX.” You should not be telling the R/C

holder what the term loan is rated. They would learn this if they held a position in both facilities. • The Agent bank’s internal risk rating and decisions regarding accrual and TDR status are confidential and are

NOT to be disclosed to the participants.  Example of what NOT to do: “We agree with the banks designation of non-accrual.”

• Collateral and Enterprise valuations are to be shown in dollars (not rounded.) Approved abbreviations if you click on the abbreviation it automatically goes into the write-up

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Structure • Automatically filled in based on the information

entered on the Loan Facility and Lender Protection tabs.

• Review this information and edit or rewrite when necessary, such as:  Duplicate information  Contains too much detail

• If Line card is completed per job aid instructions, editing should not be needed.

Credit Reconciliation • Must show Reconciled, if not examiners need to

open and reconcile noting reason for difference, e.g. principal payment or advance. See below for additional information.

Collateral and Enterprise values must be in dollars. See below for additional EntV comments

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Reports Validation Report View Previous Linecard Linecard Report Writeup Instructions

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Additional EntV comments: For situations where examiners do not want the Enterprise Value to appear in the write-up, see Lender Protection Tab, Enterprise Value section for steps that need to be completed on the Lender Protection tab.

First paragraph should provide a concise summary of the regulatory rating disposition and the primary credit weaknesses that support the disposition. Rating rationale should be measurable and consistent with Key Risk Drivers (KRD) assessment. For example if liquidity is a concern the write-up should have the same adjective as the KRD such as “weak” versus something different like “insufficient”. Either in this paragraph or in the opening of the second paragraph, the write-up should clearly state the business problem that is impacting financial performance or elevating regulatory concerns. Include justification for nonaccrual status and accounting treatment of subsequent payments, if applicable. If a credit is being restored to an interest accrual status, this paragraph should explain the rationale and timing for that decision.

Overall Conclusion/Reason(s) for Disposition • Explains why the credit facility has been assigned a particular

adverse supervisory, when it was placed on non-accrual and/or designated as a TDR.

• There is a standard interagency format for the write-up. Paragraph 1:  Rating, including nonaccrual, if applicable

Paragraph 2 (and 3 if needed)  Support for the rating (e.g., change in industry dynamics, key

metrics) Paragraph 3 (or 4)  If noted in paragraph 1, secondary support e.g., EntV,

collateral, liquidity and if applicable, TDR designation

SNC Exam Line Card Documentation Job Aid

Step 2: Chose Reconciling Items Principal Payment(s) Interest to Principal Payment(s) Line Reduction Line Increase Exam Mandated Charge-off Syndicated Charge-off Other Principal Increase Other Principal Decrease Foreign Currency Fluctuations (Increase) Foreign Currency Fluctuations (Decrease)

Step 1: Enter the respective amount, click update

Step 3: Click update

1Q 2020 Exam Page 45 of 87

Include the top three weaknesses and prioritize them, list most crucial first, then others.

Subsequent paragraphs should address each of the primary weaknesses discussed in the first paragraph as detailed below; i.e. if inadequate operating cash flow to service debt, excess leverage and/or deficient capital are listed as primary credit weaknesses, support should be provided that clearly and adequately documents these weaknesses.

Second paragraph

Support the reasons for rating provided in 1st paragraph in the 2nd paragraph. If the reasons / rationales cited are measureable, include the appropriate key measures or ratios that illustrate the concern or impact. It is important to define how any financial ratio was developed so that others can replicate the outcome. If quoting Adjusted EBITDA or EBITDAR be sure to define what adjustments were made or provide the number used.

Leverage:

• Do NOT use the terms “operating leverage” or “financial leverage” when referring to debt specific ratios. Simply use the term “leverage” and if related to a “leverage ratio,” include a description of how the ratio is calculated.

Operating Cash Flow:

• Use number/descriptive utilized in GAAP. It is usually net cash from operating activity or net cash from operations.

Adjusted EBITDA or EBITDAR:

• Use number.

Financial Ratios:

• Calculation of ratios used in the write-up must be defined.

For example, “DSC (EBITDA/cash interest + cash taxes + CAPEX + CMLTD) of 0.60x at year end 2013”.

Credit History/Terms:

• Do NOT describe the history of a credit or the specific repayment terms of a credit in the narrative UNLESS critical to support the criticized rating. For example, liberal repayment terms and/or other structural characteristics might represent potential or well-defined credit weaknesses and should be discussed.

Third Paragraph

Collateral:

• The collateral should NOT be addressed in the narrative UNLESS it is listed in the first paragraph as a primary credit weakness or is otherwise critical to support the criticized/classified rating.

Borrower’s Workout Plan:

• The narrative may discuss the borrower’s plans to improve its financial condition and ability to repay the credit if such information is necessary to support the disposition. Examiner opinion on the viability or reasonableness of such plans should not be included in the narrative of the write-up, but should be documented in the line card. Be careful what you include as other banks may/may not know this information.

Enterprise Value:

• Enterprise value should NOT be addressed in the narrative UNLESS it is listed in the first paragraph as a primary credit weakness or otherwise critical to support the criticized/classified rating. Use the phrase: recent value…careful not to state bank as this is a bank provided information not a bank group.

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Troubled Debt Restructuring (TDR):

• If a credit qualifies as a troubled debt restructuring, summarize the concessions granted in this paragraph supporting the TDR designation and provide the effective date. Do not attribute the TDR designation to the agent bank.

If it is determined that the loan is a troubled debt restructure include the following sentence in the paragraph.

• Credit is designated as TDR effective xx-xx-xxxx based on concessions granted by the bank group.

Discuss with exam team leadership and designed SME to ensure consistency.

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Signoff

The (EIC) Signoff tab is where the exam team management concurs (or expresses concern), with the voting record. This tab is for EICs or Team Leader (exam leadership) only.

Sign off comments should reflect the signer’s concurrence or concerns with the all voter ratings components:

 Support for rating  Non-accrual

 Effective date  Treatment of future payments

 Return to accrual  Trouble Debt Restructure

 Effective date

Make sure the TDR flag on voter rating tab has not been checked in error.

Reports Validation Report View Previous Linecard Linecard Report

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Appendix

Where to find the training?

Or via the links below:

• FRB Internal: https://apps.frb.gov/elearning • OCC/FDIC External: https://bsr.frb.gov/eLearning

All examiners participating in the SNC exam are required to complete the SNCnet training and take the completion check prior to the start of the exam. leveraged loans.com is outside BOG website that is provided as it has information that may be helpful to SNC examiners. The BOG does not endorse any commercial products that may be advertised or on this site. Also, the Board’s privacy policy does not apply on this site. Please check the site for its privacy notice. Below is the site’s table of contents.

1. Click on ‘Help” 2. Click on “Useful Links” 3. Click on your respective agencies “eLearning Link”

SNC Exam Line Card Documentation Job Aid

https://apps.frb.gov/elearning

https://bsr.frb.gov/eLearning

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Asset-Based Loan Line Card Documentation Job Aid This line card documentation job aid was developed to provide guidance to examiners and does not include all possible information and/or situations examiners may find during their file review. The OCC Handbook on Asset-Based Lending (ABL) dated March 2014 (updated in January 2017) contains a complete set of guidance for reviewing ABL credits. A copy of that document is included in the Help section of SNCnet and should be referred to as needed. ABL is a specialized loan product that provides fully collateralized credit facilities to borrowers that may have high leverage, erratic earnings, or marginal cash flows. These loans are based on the assets pledged as collateral and are structured to provide a flexible source of working capital by monetizing assets on the balance sheet. This job aid is intended to serve as a supplement to the SNC Exam Line Card Documentation Job Aid and therefore it only includes selected sections of the line card applicable to (or for which the expectations are unique to) ABLs. Lender Protection Tab Collateral In this section, examiners should include a full description of the following: • Eligible Collateral (as defined in the credit agreement) under the ABL borrowing base, which typically includes liquid

assets such as Accounts Receivable (AR) and Inventory (INV). o In general, to be considered eligible, the receivable must be generated in the ordinary course of business and

subject to a first-priority lien in favor of the bank. o The following are examples of types of receivables that are typically ineligible. A BB that includes AR that are

generally classified as ineligible has heightened risk:  Delinquent AR. Normally, AR are considered ineligible when they are past due by three times the terms,

e.g., 90 days for 30-day terms and 21 days for seven-day terms.  AR that exceed concentration limits  Affiliate receivables  Contra-accounts (in which the borrower sells to and purchases from the same customer)  Government AR  Unbilled AR

o Eligible inventory is typically limited by age or some other measure of obsolescence. Eligibility may also be limited by location as inventory stored in multiple locations is more difficult to monitor, control, and liquidate. Consignment goods are considered ineligible because they are owned by another party.

o Although considerable reliance on inventory in the BB may be appropriate depending on the nature of the borrower’s business, an ABL BB is usually heavily skewed toward AR, and loan agreements may impose limits on the amount of inventory in the BB. Examiners should be alert to BBs that shift from reliance on AR to reliance on inventory. This may signal financial deterioration or potential collection problems.

• Valuation source documents (i.e., AR aging schedules or inventory appraisals) • Provisions in the credit agreement that allow for advances against items that would typically be considered ineligible • Advance Rates for eligible collateral

o AR advance rates vary depending on the quality and nature of the receivables and the bank’s risk appetite. Common advance rates range from 70 percent to 85 percent of eligible AR, although some banks lend up to 90 percent for certain types of eligible AR.

o Inventory advance rates vary depending on the inventory type—i.e., raw materials, work-in-process, or finished goods. A bank typically advances up to 65 percent of the book value of eligible inventory, or 80 percent of the Net Ordinary Liquidation Value (NOLV). Finished goods and commodity-like raw materials usually receive the highest advance rates because they are easiest to sell. Work-in-process has limited liquidation value because it requires additional production inputs to become saleable merchandise. As a result, it is frequently excluded from eligible collateral.

https://www.occ.gov/publications/publications-by-type/comptrollers-handbook/asset-based-lending/pub-ch-asset-based-lending.pdf

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• Date and results of most recent field examinations/audits (including physical inspection of inventory). Field audits to

verify the integrity of the borrower’s reporting systems should be conducted at least on an annual basis and the frequency may be based on an availability trigger. o Adverse field examination or appraisal results not appropriately addressed should be noted in this section.

Covenants Examiners should describe all covenants as per the credit agreement. ABL facilities are typically underwritten with a limited number of financial covenants; the additional risk this poses to the bank is mitigated by conservative advance rates against liquid collateral, strong collateral controls, and frequent monitoring. Covenants commonly focus on excess availability and may take the form of a reserve against the BB and cash controls, such as cash dominion using a lockbox arrangement. Financial covenants, when present, typically take the form of a minimum fixed charge coverage ratio, the definition of which can vary by borrower. Limits on capital expenditures are also common in ABL. Covenants should be consistent with the borrower’s projected performance. Some lenders originate ABL facilities with springing covenants, meaning the covenants are operable only when certain conditions defined in the loan agreements are not met. For example, cash dominion may not be required unless excess availability falls below an established threshold. A springing covenant arrangement is advantageous to the borrower as fewer restrictions provide more freedom to operate. Such arrangements can, however, adversely affect the controls that are the strength of an ABL credit if triggers are set at unreasonable levels.

Financial Analysis Tab Primary Source of Repayment (PSOR) The PSOR for revolving ABL facilities is the conversion of the collateral to cash over the company’s business cycle. However, over-advances on an ABL facility are generally repaid through operating cash flows (CFs) on a term basis. A business must maintain sufficient sources of cash to meet the company’s working investment needs throughout the entire operating cycle. A well-capitalized and profitable business can often meet this need from internal operations. Given the emphasis that ABL places on collateral, banks must understand a borrower’s ability to convert working assets to cash over a meaningful period. This is commonly achieved through an analysis of the borrower’s operating cycle. Examiners are expected to include analysis of turnover metrics such as AR turnover, INV turnover, and Accounts Payable (AP) turnover, which can be compared to readily available industry data and the borrower’s historical performance. High turnover rate (or the inverse calculation, a low number of turnover days) rates are desirable as they imply successful conversion to cash. AR turnover at or above industry averages suggests effective collection practices, while a low turnover rate (or high number of days) may indicate a number of potential issues including poor credit or collection practices and customer dissatisfaction with the product. A high INV turnover rate indicates less likelihood of holding excess, stale or obsolete inventory. An AP turnover rate below industry averages may suggest cash flow problems or could signify redirection of cash proceeds to other uses. Examiners should review and assess the terms that the borrower has established with clients and the terms it receives from suppliers, and note any material deviations from industry norms. Any negative or adverse trends in the borrower’s operating/cash conversion cycle should be noted in this section of the line card.

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In addition to understanding the cash conversion cycle, examiners should evaluate the quality of the ABL collateral. For AR, consider items such as the level and trend of past-due accounts and dilution, the quality of the customer base, and any customer concentrations. For inventory collateral, examiners should consider the inventory mix (raw materials, work-in-process, and finished goods), age, and location of the inventory.

Other risk factors to be addressed in this section as applicable: • Monthly cash burn. Cash burn refers to the rate at which a company uses up its cash, and is commonly

calculated as the difference between cash inflows and cash outflows. The calculation and adjustments may vary by borrower and by bank.

• Unstable or rapid decline in excess ABL availability • CF coverage reliant on nonrecurring sources such as asset sale proceeds or changes in working capital (e.g.,

inventory reductions from store closures) Secondary Source of Repayment (SSOR) Examiners should fully describe SSOR for ABL facilities. One of the SSORs for revolving ABL facilities is the liquidation of the underlying collateral. As a result, the institution’s controls over BB assets (e.g., lockbox arrangements for AR and field inspections of INV) are critical in determining the value that can be realized. Refer to the Collateral section for details. CF from operations is considered a secondary source of repayment for ABL revolvers because the operating CF stream is often allocated entirely to cover fixed charges. Sponsor support may also be considered a SSOR when the institution can document the sponsor’s history of demonstrated support and its economic incentive, capacity, and stated intent to continue to support the transaction. A thorough analysis of the borrower’s operating performance and operating cash flow is important in properly risk rating an ABL relationship. It is considered a secondary source of repayment for an ABL revolver, but the primary source of repayment for an ABL term loan or over-advance and the key determinant in assessing term loan risk. An evaluation of operating performance and cash flow is important when other weaknesses exist in an ABL revolver, such as weak underwriting or collateral controls, liberal advance rates, illiquid borrowing base assets, over-advances, infrequent asset appraisals and field exams, and low excess availability thresholds for springing cash dominion and springing covenant testing. Performance to Plan Similar to other types of credit, examiners should address the following in this section:

• Unrealistic company turnaround plan with actual performance trailing below plan • Failure to provide reliable projections of liquidity and borrowing needs

Liquidity ABL repayment depends primarily on the conversion of working capital assets to cash. The quality and liquidity of the underlying assets are essential to the lender’s decision to extend credit. In some cases, CF from operations may not be sufficient to meet fixed charges. It is important, therefore, that examiners perform a robust evaluation of liquidity.

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Characteristics of liquidity that should be addressed in the section include:

• Sufficient liquidity/excess availability trends, with no extraordinary short-term liquidity needs • Ability to cover cash burn over the past 12 months • Ability to cover projected cash burn and other liquidity needs for the next 12 to 18 months • Realistic projected liquidity needs • Excess availability trends in line with plan

Examiners should ensure that liquidity assessments related to line availability properly account for quality of the pledged assets and any limitations or restrictions that are in place or could restrict funding (e.g., minimum thresholds, soft or hard blocks, springing covenants, AR concentration limits, inventory limits, etc.). Transaction structure The typical ABL facility is structured on a stand-alone basis; however, ABL facilities are sometimes part of a larger leveraged capital structure which includes other term debt. In such cases, the ABL will have lien priority over the BB collateral assets. A well-structured ABL should be self-liquidating in nature, with little or no reliance on illiquid BB collateral or over- advances. However, some (hybrid) ABL structures include a portion of illiquid assets in the BB which may be an enhancement to mitigate an initially weak or inadequate self-liquidating collateral pool or to cover potential over- advances/stretch collateral in the BB. Reasons for securing the facility with illiquid assets include: abundance of caution, and/or to maintain control over excess collateral. Items to be addressed in the section include whether:

• The ABL availability is governed by a BB formula that specifies eligible collateral and advance rates, and the BB and availability are calculated at least monthly. (Most ABL facilities are reconciled and funded/repaid daily.)

• Lenders receive periodic reports such as an AR assignment schedule, AR collection schedule, and a BB certificate to monitor the borrower’s accounts and collateral effectively.

• Lenders perform (or contract with independent firms for) field examinations/audits of the borrower’s business, records, and collateral, as well as asset appraisals, at least annually or more frequently if warranted by the borrower’s risk profile.

• The structure includes cash dominion of funds. On well-structured ABLs, lenders have the right to take full dominion of the borrower’s cash collections and apply the proceeds to outstanding loans under the ABL facility. Lockbox arrangements outline the general conditions and procedures for application of cash payments to the outstanding balance. Cash dominion covenants should also be addressed in the Lender Protection Tab of the line card.

• Structures include availability triggers for more frequent monitoring or reporting. For example, if availability under the facility is reduced to 10%, BB reporting may shift from monthly to weekly or field exam frequency may increase to twice per year, depending on the creditworthiness of the borrower.

Voter Ratings Tab When risk-rating ABL facilities, it is important to keep in mind that ABL is a collateral-focused type of commercial lending. ABL revolving credit is extended based on the value and liquidity of the borrower’s assets, the collateral control structure, and the bank’s ability to monitor the assets and potentially convert them into cash. The risk-rating assessment of an ABL facility should focus on the following factors:

• The primary source of repayment for the facility (conversion of working capital assets)

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• The quality and liquidity of the pledged collateral • The strength of the ABL structure and controls • Actual performance versus projected performance at underwriting • The capital position and legal structure of the facility relative to repayment priority and the sharing of collateral

proceeds Other risk factors to be addressed in this section:

• Properly structured ABL facilities rated on a liquidity basis, where the borrower is in full compliance, may be afforded a more favorable risk rating than operating performance may initially indicate. At a minimum, the borrower should be performing to plan and have sufficient liquidity to cover expected CF shortfalls and liquidity needs for the next 12 to 18 months.

• ABL facilities structured as pari-passu with other senior tiers, and sharing repayment and collateral proceeds, are not considered well-structured and therefore should be risk-rated similarly to those other senior facilities.

• A facility that is not properly structured and controlled or does not have sufficient total liquidity, is more appropriately risk-rated on an operating performance and cash flow basis.

• An ABL facility can be risk-rated independently of other debt tiers if it is structured as a stand-alone facility with a specific source of repayment and dedicated pledged collateral. In some cases, it may be appropriate to “Pass” the ABL facility even if other tranches are criticized or classified.

• Examiners may assign a less favorable risk rating to the FILO (First In, Last Out) tranche than the typical ABL, depending on specific circumstances.

• ABL facilities that demonstrate the following attributes may be subject to an adverse credit risk rating and warrant consideration for rating based on an operating performance and cash flow basis: o Weak underwriting structure or collateral controls o Liberal advance rates o Material reliance on illiquid assets in the borrowing base o Significant and/or ongoing over-advances in the borrowing base o Infrequent asset appraisals and field exams o Low excess availability thresholds for triggering springing cash dominion and springing covenant testing o “Airball” term loan structures

Other Risk Rating Considerations to be addressed in this section:

• Quality of the underlying collateral and collateral trends when assessing an ABL on a liquidity basis: Collateral quality issues, such as AR concentrations (particularly when not properly analyzed by the bank), lengthening of the operating cycle, recurring inventory write-downs, and unaddressed adverse field examination results, should be properly reflected in the assessment of the ABL facility

• The following list provides some characteristics that deserve an examiner’s attention and may warrant an adverse risk rating: o Failure to meet earnings or liquidity projections o A significant unplanned increase in cash burn or a decline in revolver availability o Excessive leverage, in the context of ABL facilities o Unexpected debt needs outside of the ABL revolver o Significant recurring losses o Frequent over-advances with unreasonable repayment structures o Failure to perform on a related debt o Failure to provide timely financial information, including collateral monitoring information

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• An adverse rating may also be appropriate if the bank must liberalize advance rates or definitions of collateral eligibility, including the addition of fixed assets to the BB, to keep the loan advances within the BB formula. If liquidation of collateral (e.g., a forced sale by the bank or borrower) is an ABL facility’s most likely source of repayment, the loan would likely be classified as substandard at best.

• Negative trends in the borrower’s operating cycle and overall financial performance can indicate credit or collateral quality deterioration that could lead to an adverse risk rating. The following are examples of factors the lender and the examiner should investigate: o Slowing inventory turnover or AR collection o Recurring inventory write-downs o Prime inventory sell-offs that adversely alter the mix of inventory o Extended payables o An inventory buildup not supported by sales o An out-of-formula borrowing base o Adverse field examination or appraisal results o Increases in monthly cash burn and liquidity needs o An unstable or rapid decline in excess availability o Operating performance that materially deviates from planned performance o Borrower’s inability to provide reliable projections of liquidity and borrowing needs

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Leveraged Loan Cash Flow Worksheet Job Aid Complete at least one cash flow worksheet (CFWS) per obligor using instructions below; see your exam team leadership for any clarification, or questions, at any point in the credit quality assessment process.

Objective

The CFWS is a tool used to supplement the assessment of the credit quality of an obligor under review and the quality of underwriting demonstrated by the agent or other bank under examination. Bank prepared base case (base case) projections should be used as the starting point for analysis. When examiners consider aspects of the base case analysis unreasonable, they should be raised to the examiner’s team leader and examiner-in-charge. Where aspects of projections are not well supported and also deemed significant based on the judgment of the exam team, specifics should be raised and discussed with bank management. If changes need to be made to the base case projections, have bank management re-run projections to reflect a forecast that is considered reasonable with a well-supported basis for the numbers. Shortcomings are to be documented in the Risk Management section of the line card and potentially aggregated into a formal finding. This process is what would inform and document the support and audit trail for an examination finding in a supervisory letter.

The base case CFWS that is used for the primary risk-rating analysis should be completed on the CFWS downloaded from SNCnet; no changes to the naming convention are to be made. This CFWS version will be uploaded into the line card and used for portfolio level risk analyses and assessments. If other CFWS’s are prepared for additional examiner analytical and assessment purposes, they should be attached to the line card with the naming convention including the obligor name, RSSD ID and additional analysis. Naming convention example: Happy Times_ 123456_CFWS_additional analysis.

Multiple CFWS

There are two LL CFWS’s:

1. Full CFWS which contains standard and stub year options: “Full” CFWS 2. Investment Grade (IG) and Noninvestment Grade (NIG) Pass: “Abbreviated” CFWS

Below is the LL CFWS linecard population process based on banks’ reported internal ratings:

LL Obligors Bank Reported Rating CFWS populated in Line card All credits rated Lower Rated Pass (LRP) or worse Full only Mix ratings of Investment Grade (IG) Pass/ Non- Investment Grade (NIG) Pass credits and LRP or worse credits

Both Full and Abbreviated  EIC/TL will need to remove one (most likely

the Abbreviated) All credits with IG / NIG Abbreviated only

NOTE: The CFWS will be initially populated based on the bank’s reported ratings. When the latest bank ratings are entered on the linecard it will affect the above; CFWS may be automatically added or removed based on the changes made. Thus, it’s strongly recommended that CFWS be saved on examiner’s computer so if removed based on bank’s updated reporting, work is not lost.

Full CFWS

The Full CFWS includes the option to complete the CFWS using an annual or stub year. This CFWS will appear for leveraged borrowers not tagged as Abbreviated Pass (see the Abbreviated CFWS discussion on page 2 for additional information.)

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The Full CFWS has four options (Standard, Stub-3 Months, Stub 6-Months and Stub 9-Months) which you select in Row 13 Column B. See Procedures to Access and Save CFWS in SNCnet section step #4. Standard is the default setting.

• The ability to flat line remains for the Standard option ONLY. For the flat line calculations to be accurate, DO NOT enter any data (including zeros) in projection columns where no bank base case projection data has been provided. You can enter provided data into as few as one projection period column for the flat line formula capability to be utilized and data summary tab repayment ratios to be calculated.

• CFWS section print screens for both standard and stub years are included in the job aid as depending on which CFWS option is used. Some cells are not applicable and are shaded black (black cells.) See the Data Input Tab Instructions – Full CFWS for additional information.

Abbreviated CFWS

The Abbreviated CFWS is only to be used when the following criterion is met:

• Leveraged borrowers whose internal risk rating is a concordance IG or NIG Pass on the credit facility tab.

Examiners have the discretion to use the Full CFWS for concordance rated IG or NIG (Pass) after discussion with exam team leadership.

Both the Full CFWS and Abbreviated CFWS will appear in the line card for borrowers tagged as Abbreviated. Exam leadership (EIC or TL) will need to remove the CFWS that will NOT be completed.

• Should the Concordance Ratings on the Credit Facilities tab include a MIX of IG/NIG Pass ratings and any other ratings (i.e. Lowest Rated Pass (LRP) or worse), consult your Team Lead or EIC about whether to utilize this Abbreviated CFWS version or the Full CFWS version.

Procedures to Access and Save CFWS in SNCnet

Each individual CFWS is now downloaded / uploaded within the Financial Analysis tab for each obligor in SNCnet as follows:

1. Click the “Download Worksheet” link within the Financial Analysis tab. 2. Examiners need to open, then immediately save the CFWS on their computer. 3. Click “enable editing” to show data and enter inputs.

4. When completing the Full CFWS, Click in Row 13 Column B and use the drop down arrow to choose Standard

or Stub BEFORE you start to enter any data in Rows 16 and below.

Click here

Step 4 for Full CFWS

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5. Once completed the final version of the CFWS is to be uploaded into SNCnet using the “Upload” link in the Financial Analysis tab.

6. When edits are needed to the CFWS after uploading once again click the “Download Worksheet” link to download and open the previously completed CFWS.

7. Complete steps 2 through 3 above once changes are made.

There is an E-learning tool that is an interactive session on the above.

Incorrectly Flagged Leveraged Lending (LL) Borrowers

If the bank has not properly flagged a borrower as leveraged in the Credit Facilities tab or incorrectly identified the borrower as leveraged, examiners should identify this error and communicate with your local SNC exam team leadership. SNC examiners should not independently change the LL designation in the line card. Such a change should only be completed in consultation with the SNC Office.

If a borrower is flagged as LL by the bank and it’s not meaningful to complete a CFWS, (e.g. project financing) examiners should discuss with your exam team leadership to determine the appropriateness of completing the CFWS. If it is determined not to complete the CFWS then exam team leadership should notify examiners performing QA on the review.

Obligor Name Change

Obligor name change request timing may create an error when uploading. This occurs when an obligor name change request has been submitted and the examiner has downloaded a LL CFWS which has the old name associated with it. When this occurs examiners are to email the completed LL CFWS to the respective agency SNC email address below.

• FDIC: [email protected] and [email protected] • FRS: [email protected] and [email protected] • OCC: [email protected]

The name will be corrected and the corrected LL CFWS will be timely emailed back to the examiner to be uploaded.

Expectations and Common Issues for Base Case Projections

• If examiners and team leadership conclude that bank projections, including adjustments to EBITDA and /or revenue growth, are not reasonable and/or well supported, a discussion with bank management is needed. Bank management should rerun projections if deemed necessary. If examiners decide to run different cash flow (CF) scenarios for further analytical purposes, new CFWS’s may be prepared and attached to the line card as in prior SNC examinations, but not be labeled as Final.

• It should NOT be automatically assumed that all excess cash flow (ECF) is applied to reduce debt.  In most cases the bank will need to re-run their projections to include only required principal payments.  Debt reduction from ECF in base case projections should only be included when a prior recent history of

debt reduction from ECF has been exhibited and is expected to continue.

Steps 1 & 6 Step 5

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mailto:[email protected]

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• Projected interest expense using the 3-month LIBOR forward yield curve is considered a best practice for variable rate debt. If bank projections are not prepared using a forward yield curve, inform the exam team leadership. The supervisory response is an exam site call in relation to other factors affecting the cash flow projection quality assessment.

Additional CFWS for Analytical Purposes - Full CFWS

On occasion Examiners complete additional CFWS for analytical / sensitivity purposes. When these are completed they are to be included as an ATTACHMENT in SNCnet and NOT uploaded.

Data Input Tab Instructions - Full CFWS

NOTE: Purple cells require examiners data input or the CFWS cannot be uploaded. There are 6 required components needed to calculate ratios on the data summary tab that were changed from purple filled in cell to purple font in Column A (listed below.)

 (Total Revenue (Row 16), EBITDA (Row 22), Changes in non-cash WC (Row 50), CMLTD (Row 53), Cash Interest Paid (Row 54) and Maintenance + Growth CAPEX (Row 64).)

When the Standard CFWS is selected in Row 13 columns B and E will be black cells as its not applicable (used for stub year.) Also, Row 68 Columns B, C & D are black cells.

• Data Input tab changes  No data should be input into any Row for Column E when using the standard CFWS; the font color is

white to identify keying errors in this column. If data is entered in this field, delete it or change to “0.” • Data Summary tab changes

 Repayment Capacity section Rows 9 - 27 Column E and Rows 35 & 36 Columns B, C, D and E cells are black.

When the Stub period is selected Row 13 Columns B, Row 17 Columns E and L will be black cells. Also, Row 68 Columns B, C & D are black cells.

• Data Input tab changes  Row 17 Column E and L are locked as revenue growth cannot be calculated for a partial year.

• Data Summary tab changes • Repayment Capacity section Rows 11 through 27, Column E and L and Rows 35 and 36 Columns B, C and

D cells are black cells.

Yellow cells should be completed if data is available. Colors will clear with input.

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Row #s Instructions / Comments 4 & 5 These cells are automatically populated with the obligor names and RSSDs on the Read List.

• Override is permissible only for new borrowers added to scope (only borrower name and RSSD# should be overridden in this instance).

7 & 8 Enter into column B the borrower’s most recent available FYE and TTM (Trailing Twelve Months) Interim financials.

Comments and Clarification

There is the ability to document comments to the right of the data in the same Row. Please refer to the Comments and Clarification (examiner Notes) discussion in the respective section below.

Revenue / EBITDA

View below is for the standard CFWS option

View below is for stub CFWS option (3 months)

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Row #s Instructions / Comments ALL DATA Input all data in US $ & in thousands

If borrower financials and bank projections are in foreign currency, examiners must convert the foreign currency to US $ on the CFWS. A document will be uploaded to the Help section of SNCnet which will detail the conversion rate to be utilized for all major currencies. That same conversion rate should be used for all Actual, TTM, and Projected periods. The currency rate conversion dates that will be used are: for the 3Q exam, June 30th, and for the 1Q exam, December 31st.

ALL DATA TTM (column D) should be included in the bank's analysis and may also be referred to as LTM (Last Twelve Months). TTM data is for the most recent interim financial statement (FS) date. If you need to calculate this data it is done as follows:

• Most recent interim data plus the most recent FYE data minus the corresponding interim quarter(s) 12 months before the most recent quarter(s): example 3 months 03-31-2017 plus 12-31-2016 minus 03-31-2016 (see the TTM calculation primer in SNCnet Help section for an illustration).

• For questions on certain TTM components, such as CAPEX or changes in non-cash working capital (WC), see the exam team leadership.

Projected (Column E-L): Source document is the most recent Bank base case: do NOT adjust.

• Worksheet formulas assume that all periods are annual. • The most recent projections may not be the same as those used in the original underwriting. • If the borrower has materially missed projections and updated projections aren't in the file, a

request for updated projections should be made. • If original projections are > 2 years old, discuss with bank management and requested updated

projections. If projections are not available for all 7 years, the CFWS will automatically calculate the repayment capacity ratios using data from the last projection year provided for all remaining projection periods when computing ratios on the Data Summary Tab. Thus, columns are to be left blank beyond the last projection period – Do NOT input zeros.

16-25 Source documents are the balance sheet (BS), Income & CF statement (Actual column B-D), Base case projections (E-L)

19 Make sure to enter the projected original base case Revenue at time of underwriting for all applicable periods.

• Ensure data is entered in the correct column as the loan seasons. I.e. assuming 2016 FYE is the current date for the Actual column for a loan that originated in 2014, original projections for 2016 would be entered into column C and the last 2 projection periods would be blank.

Depending on the origination date there may not be information for all projected periods. 23-25

EBITDA Adjustments are now a calculated total from inputs in rows 82-101; see the respective row’s comments below for additional information.

29 Make sure to enter the projected original base case Adjusted EBITDA at time of underwriting for all periods.

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Debt View below is for the standard CFWS option

View below is for stub CFWS option (3 months)

Row #s Instructions / Comments 32-47 Source Documents are BS and notes to FS; use bank projections (columns E-L).

NOTE: The TTM column should reflect the actual amount of current committed/outstanding debt. If new debt was extended since the TTM date, the TTM column debt should be updated to reflect this.

32-42

Debt should generally be entered into the CFWS as follows: TLs reduce by the required amortization per the credit agreement (often 1%). If debt matures during the projection period, discuss appropriate slotting with the team leader. For most cases, the assumption that TL debt will be refinanced with continuing TL reduction by a required 1% principal payment would be reasonable.

• RCs should have some basis for the amounts shown for outstandings in the projections periods. These amounts should be reviewed for reasonableness by taking into account prior line history and future borrower plans and WC needs.

• Bank base case should only reflect ECF recapture reducing debt balances if (1) there has been a demonstrated history of paying down debt per the credit agreement’s ECF recapture provision which is supported via covenant compliance certificates and loan payment history and (2) this is the most likely expectation for the projected use of cash.

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Row #s Instructions / Comments 32-42

HC Debt:

• If the borrower is an operating subsidiary, holding company (HC) debt should be included in the outstanding/committed debt Rows in the CFWS if the following conditions are generally met: the borrower’s FCF is the primary source of repayment (PSOR) for HC debt, a cross- default provision exists, and HC debt cannot be legally excluded as a liability of the borrower (i.e., ring fenced through a default provision or bankruptcy). See the exam team leadership for assistance in this determination.

• If HC debt is included in the CFWS then any associated CMLTD, Cash Interest Paid, and PIK interest on the debt should be reflected in the CF Needs and Total Fixed Charges calculations on Rows 50-56. In this case, any actual/projected dividends or distributions from the borrower to the HC should not be included in the fixed charges section.

• For perpetual PIK preferred equity like instruments, examiners are to request a copy of the agreement between the borrower and the preferred equity provider to analyze for determination if debt or equity. Examiners are to raise these instances to exam team leadership for discussion / determination.

If HC debt is not included on the CFWS, but dividends or distributions from borrower to the HC are the PSOR for the HC debt, then those charges should be included within the fixed charges in Row 53 “Required Cash Dividends”. If the HC has no other repayment source or is primarily dependent upon the borrower for OCF, this will often be reflected in dividends/distributions itemized in historical financial statements and financial projections. There will be times when itemized documentation of dividends/distributions will not be evidenced, such as carve-outs and startups, and examiners will need to determine whether these will be expected to occur and should be scheduled in the CFWS.

43 Other outstanding debt instruments would include capital leases. 47 Incremental debt should include the "freebie" amount plus the amount currently available (subject to

an incurrence test.) The total current available amount is entered in the TTM column. The projection years in the CFWS will not automatically populate based on TTM column. If bank projections include such information you are to enter in the amounts in the applicable projection period(s). IF INFORMATION IS NOT AVAILABLE FOR PROJECTED PERIODS – NO INPUT IS EXPECTED The incurrence test can be difficult to determine when the borrower’s actual results are close to the incurrence ratio limit. Only include the amount that would take the borrower up to the covenant limit, as any breach of the covenant limit would be an event of default.

Changes in non-cash Working Capital (WC) Assets

View below is for the standard CFWS option (note column E is for a stub period)

View below is for stub CFWS option (3 months)

Row #s Instructions / Comments 50 Source Documents are IS and BS statements and notes to FS (columns B-D); Base case projections

(columns E-K) Used in the calculation of FCF.

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Row #s Instructions / Comments

50 • Current assets amount must exclude cash. A year-over-year increase in current assets is a use of cash while year-over-year increase in current liabilities is a source of cash.

• Refer to consolidated statement of CF’s for change in current assets and liabilities items.

Changes in non-cash WC may be provided in the Notes to FS. This field must be completed for actual and all applicable projected periods as FCF will not calculate without this information. If not provided by the bank and examiners calculate the change in WC the preferred method is to use the CF statement.

• Include only changes in current assets/liabilities; don't include any items that are below the EBITDA line (i.e. changes in income tax accruals.)

• If you calculate this from BS (CA-CL), do NOT include the change in cash balances – example.

Cash Flow Needs

View below is for the standard CFWS option

View below is for stub CFWS option (3 months)

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Row #s Instructions / Comments 53-59 Source Documents are IS and CF statements and notes to FS (columns B-D); Base case projections

(columns E-L) 53 Often reflects required 1% amortization. If debt matures during projected period; generally assume

debt is refinanced and the current amortization continues. 54 Bank’s models are NOT to include interest income on cash balance build-up; cash interest expense

should be gross not netted for interest income. 55 & 57 For historical periods, cash interest paid and cash taxes paid are NOT usually what is shown as

expenses on the IS. You'll find these either noted at the bottom of the CF statement or reading the notes to the FS.

55 PIK Interest must be included if part of debt structure. Examiner judgment is to be used on how PIK is incorporated into analysis contained in the line card regarding key risk drivers, (such as repayment capacity, leverage and refinance risk); i.e. is PIK interest associated with subordinated debt?

• Refer to Rows 29-40 HC debt discussion for additional information. 56 Input when there is a required cash dividend to pay and it is expected to continue.

• Refer to Rows 29-40 HC debt discussion for additional information. 58 Source document is notes to FS.

Rent expense is for operating leases. • Operating lease is a rental of an asset from a lessor; no asset is recorded on lessee’s BS. This

is different than a capital lease which is a lease which the lessor only finances the leased asset and all other rights of ownership transfer to the lessee; thus recorded on lessee’s balance sheet as a fixed asset.

• This is used to calculate the FCC ratio. 59 This is an additional field in case the examiner needs to add a miscellaneous cash source or use.

Example of other category item; required pension payments. 60 Calculated field - sum of all CF Needs Rows.

Capital Expenditure (CAPEX)

View below is for the standard CFWS option

View below is for stub CFWS option (3 months)

Row #s Instructions / Comments 64 Source Document are notes to FS (columns B-D); Base case projections (columns E-L) 64 Include CAPEX (both maintenance and growth) funded from the company’s internal CF. Do NOT

include any CAPEX funded with additional debt. Only CAPEX financed with company cash earnings reduces the operating CF used to determine ability to repay debt.

• Bank projections should reflect the above. • Review projections to ensure projected CAPEX is reasonable given projected growth.

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Free Cash Flow (FCF)

View below is for the standard CFWS option

View below is for stub CFWS option (3 months)

Row #s Instructions / Comments 66 Cash available after laying out money to maintain or expand borrower’s asset base

67-68 • These are calculated fields. • If the required EBITDA, CF Needs, changes in WC, and Capex are not filled out, then the

spreadsheet will NOT calculate FCF; it will read “#NA.”

Liquidity

View below is for the standard CFWS option

View below is for stub CFWS option (3 months)

Row #s Instructions / Comments 71, 75 &

77 Source Documents are BS and notes to FS for restrictions (columns B-D); Base case projections (columns E-L). Cash needs may be included in bank’s approval / underwriting documents.

71 The projection years in the CFWS will not automatically populate based on TTM column. If information is not projected by the bank, copy and paste TTM data in all projection periods.

72 Available RC is a calculated field. (RC commitment - RC outstanding) 73 This field is to adjust for Borrowing Base (BB) availability. Enter the maximum potential amount

available per the respective BB calculation. If BBC information is not projected by the bank, copy and paste TTM data in all projection periods. If the BBC as of the TTM is not available enter the BBC as of the most recent available date.

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Row #s Instructions / Comments 74 Automatically populates from Row 36. 75 Enter issued and undrawn letters of credit, supported by the RC, for the respective period. 73 Calculates from RC commitment (line 72) unless RC BBC is input then uses line 73 if this amount is

lower than the amount on line 72. 77 This information may not be included in projections; examiners should review the approval /

underwriting documents for cash needed for operations as it may be included. If not found, examiners should request the information from loan officer. Ascertaining the amount to put in this line item is particularly important for obligors operating in cash intensive industries requiring significant cash holdings on a daily ongoing basis such as grocery stores and casinos.

NOTE: Liquidity ratios which may assist examiners in completion of their analysis are found on the Data Summary Tab starting with Row 29. The ratios have to be calculated and entered.

Comments and Clarification (Examiner Notes) - Columns

Comments are to be entered for the respective topic in column L; comments will not wrap so they are to fit in the respective space.

Note columns B - L have been hidden for screenshot below.

Examiners enter information in Columns M

Examiners will NOT be able to enter information into column A

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Row #s Instructions/ Comments ALL Comments & Clarifications is an important section and there are two areas that examiners can

document comments. Column M is to be populated 1st with those provided in Rows 82-101 being used to document additional information only if necessary. Column M text does NOT wrap. Please leave a clear audit trail on the source of the data as well as explanation for all significant adjustments. The source documents for each section is included in the job aid, this information does not need to be repeated. However, if information is found outside the BS, IS, CF or projections, provide sufficient information for others to easily locate.

• Based on your comments, subsequent reviewers should easily be able to verify data input. Examples

Column A Column M

Adj:# 2 Bank provided EBITDA reconciliation - attachment 2 Outstanding RLOCs (including ABLs)

Outstanding RLOC is taken from 10K, page 65 loans and notes payable

EBITDA Adjustments by Categories

View below is for the standard CFWS option

View below is for stub CFWS option (3 months)

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Row #s Instructions/ Comments 82-101 There are 20 rows for the three types of EBITDA adjustments.

• Column A has 6 rows for synergies/cost savings/optimization expenses and 7 rows for non- cash and non-recurring, respectively

• Column B-L are for inputting the respective adjustment amounts • Column M is for description of the adjustment

Enter a positive number to reverse an extraordinary or nonrecurring expense; enter a negative number to reverse an extraordinary income or revenue item. Evaluate the reasonableness of the bank's adjustments. If any adjustments are viewed as unreasonable and significant, provide details in the CFWS notes, identify as an issue in the Risk Management section of the line card, and discuss with on-site examination leadership and bank management to determine if the bank needs to re-run projections.

• If it’s decided that the bank needs to re-run projections, a comment must be included in the Comments and Clarifications section, should state “Exam team requested projections to be rerun during exam because….”

It is generally reasonable to include as adjustments:

• Noncash expenses that will not become cash anytime soon or ever. Examples: goodwill or other assets impairments, stock based compensation expenses.

Non-recurring income or expense items. Examples: large restructuring charges, significant acquisition costs. Beware that restructuring costs may impact future period projections. This may be acceptable if reasonable and adequately supported.

• A comment explaining the nature & reasonableness of each significant adjustment shown in Rows 20-22 needs to be included in the primary source of repayments (PSOR) key risk driver section of the line card.

Synergies may be included in projected periods; however, they must be well supported and discussed with exam team leadership. It is generally not reasonable to include as adjustments:

• Management fees paid to sponsor; Any expense that is recurring in nature.

82-87 Synergies, Cost Savings, Optimization Expense: show individual items, if insufficient number of rows, total insignificant ones and provide comments in Column M.

88-94 Non-cash: Show individual items, if insufficient number of rows, total insignificant ones and provide comments in Column M.

95-101 Non-Recurring: Show individual items, if insufficient number of rows, total insignificant ones and provide comments in Column M.

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Data Summary Tab Instructions - Full CFWS

This tab represents calculated fields.

Repayment Capacity Ratios View below is for the standard CFWS option

View below is for stub CFWS option (3 months)

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Row #s Instructions/ Comments 10 If the required EBITDA, CF Needs, changes in WC, and Capex are not filled out, the spreadsheet will not

calculate FCF; it will show “No Data.” • Footnote 1 Adj EBITDA - CapEx- Interest Paid - Required Cash Dividends - Taxes Paid + Changes in

WC 11 & 12 Used to determine borrower capacity to cover interest expense.

• Footnote 2 Adj EBITDA divided by Interest Paid (Row 11) • Footnote 3 Adj EBITDA divided by Interest Paid + PIK Interest (Row 12)

13 Indicates the ability to service debt. Footnote 4 Adj EBITDA divided by Interest Paid + PIK Interest + CMLTD

14 Indicates the ability of FCF to cover fixed changes. • When assessing the adequacy of the FCC ratio, review the required principal amortization. Lower

amortization levels such as 1% on most leveraged loans, make higher FCC ratios less meaningful. • Footnote 5 Adj EBITDA divided by Interest Paid + PIK Interest + CMLTD+ Required Dividends +

Taxes Paid + Maint. & Growth CapEx + Other(+/-) • If company has rent expense then Footnote 5 Adj EBITDAR divided by Interest Paid + PIK Interest

+ CMLTD+ Required Dividends + Taxes Paid +Maint. & Growth CapEx + Other (+/-) + Rent Expense

If there are no rents this will be blank. • If borrower has significant rent expense, use EBITDAR based ratios in your analysis. If not

significant, use EBITDA based ratios. • For the Operating Lease amount in the numerator of this ratio, the CFWS multiples the current

lease payments x 8 to generate a proxy for the present value of the lease obligations and reflect them as debt-like obligations.

• Note: It’s possible for the bank to use a different lease multiple other than 8 times. Examiners should closely scrutinize any multiple other than 8 times when assessing the bank’s EBITDAR based leverage ratio calculation.

• While examiners cannot adjust the 8 times multiple utilized in the CFWS formula, they should discuss the merits of the bank’s support and reconcile differences between the two approaches within the Financial Analysis section of the line card, Key Risk Driver, Borrower Leverage Risk.

For loans requiring write-up, if there is a notable difference in the leverage based on the bank’s multiple versus the CFWS calculated leverage, examiner may use the leveraged based on the supported bank multiple. Remember to disclose the multiple in the write-up when showing the ratio calculation.

• Change to the CFWS was not done as GAAP will require operating leases to be included on the balance sheet effective 01-01-2019 for public companies.

30 Calculates the ratio of Synergy related adjustments to Adjusted EBITDA(R). 31 Calculates the ratio of all adjustment to Adjusted EBITDA(R). 35 Calculates the debt pay-down progression for total outstanding senior debt.

Calculation is the respective period Cumulative Examiner Projected Calculated FCF (data input Row 68) / TTM total outstanding senior debt (data input Row 39 column D.)

36 Calculates the debt pay-down progression for total outstanding debt. Calculation is the respective period Cumulative Examiner Projected Calculated FCF (data input Row 68) / TTM total outstanding debt (data input Row 45 column D.)

38 Calculates the ratio for the specific period to total debt repayment. 39 Calculates the ratio of total debt projected to be repaid in the remaining periods.

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Repayment Capacity The 5-year repayment capacity ratios have been removed as data is not available to calculate these ratios in the stub year scenarios.

Row #s Instructions/ Comments 46-52 Calculations:

• For the Actual and TTM periods repayment ratios:  Numerator represents FCF for the respective period x 5 or 7 year projections.  Denominator is debt for the respective period.

• For the Projections 5 and 7 year repayment ratios:  Numerator is accumulated projected FCF for 5 or 7 years.

- Note: If there is not a complete set of projections (e.g. only 3 years of projections) then accumulated FCF for the numerator will be based on years 1-3 of projections + (year 3 projections x 2 for the 5 year repayment ratio) or (year 3 projections x 4 for the 7 year repayment ratio). In other words, the level of FCF for the final year of available projections is flat lined for the remaining time periods.

 Denominator is debt from TTM period. 55 & 56 Incorporates available debt under Incremental Facilities 46-52 Calculations:

• For the Actual and TTM periods repayment ratios:  Numerator represents FCF for the respective period x 5 or 7 year projections.  Denominator is debt for the respective period.

• For the Projections 5 and 7 year repayment ratios:  Numerator is accumulated projected FCF for 5 or 7 years.

Denominator is debt from TTM period.

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Row #s Instructions/ Comments 55 & 56 Incorporates available debt under Incremental Facilities

Data Input Tab Instructions - Abbreviated CFWS

Contrary to the Full CFWS for the IG/NIG CFWS Examiners DO NOT enter any data in this tab. Data is entered in the data summary tab only.

This abbreviated CFWS is designed for Leveraged Loans and the following two scenarios describe the ONLY instances when utilizing this CFWS version is acceptable.

1. The Concordance Rating for ALL reported credits on the Credit Facilities tab is Investment Grade (IG) Pass or Non-Investment Grade (NIG) Pass. If these conditions are met then enter data into the two required fields on the Data Summary tab.

Note: Even when all Concordance Ratings are IG/NIG Pass, examiners have the discretion to instead utilize the Full CFWS if deemed beneficial for analytical purposes. Consult your Team Lead or EIC when considering this option.

2. The Concordance Ratings on the Credit Facilities tab include a MIX of IG/NIG Pass ratings and any other ratings i.e. Lowest Rated Pass (LRP) or worse. If these conditions exist then consult your Team Lead or EIC about whether to utilize this CFWS version or the Full CFWS.

Note that for Leveraged Loans, the Line Card will automatically populate the Financial Analysis tab initially with both the Full CFWS version and the Abbreviated CFWS version. Only one completed CFWS version should uploaded into the Line Card. The EIC or a Team Leader will need to remove whichever version of the CFWS is not utilized.

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Data Summary Tab Instructions - Abbreviated CFWS

There are two ratios that are to be entered in numeric format (i.e.5.60) (no “x” is entered) from bank’s recent projections.

Row #s Instructions/ Comments 27 Total outstanding debt leverage as of TTM.

 For borrowers which have rent expense the ratio entered should be based on EBITDAR. If there is no rent expense, enter the ratio based on EBITDA.

 Enter source document(s) used to ascertain /compute the inputted ratio in Column G. 51 Projected total outstanding 7-year debt repayment capacity.

 Enter source document(s) used to ascertain /compute the inputted ratio in Column G.

3. Click Down Arrow 4. Chose Abbreviated CFWS or Full CFWS

5. Click Down Arrow 6. Chose CFW is a duplicate or CFWS is not applicable

7. Click Remove

1. Click Other Actions 2. Chose Remove Cash

Flow Worksheet

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Oil and Gas Cash Flow Job Aid Complete CFWS using instructions below; see your exam team leadership for any clarification, or questions, at any point in the credit quality assessment process. There are three tabs of the worksheet.

1. Outstanding Bal Repayment Test: Data is entered in this tab. 2. Full Commitment Repayment Test: No data is entered in this tab, results generated from tab 1 entries. 3. Summary Results: There is some data entry required.

Objective

This worksheet is an indicator of the borrower’s repayment ability based on the most recent analysis of the borrower’s reserves. Note: Data should be input under the appropriate tab for current balance and fully funded scenarios. Summary results are located under the third tab at the bottom of the worksheet. Procedures to Access and Save CFWS in SNCnet

Each individual CFWS is now downloaded / uploaded within the Financial Analysis tab for each obligor in SNCnet as follows:

1. Click the “Start Worksheet” link within the Financial Analysis tab. 2. Examiners need to open, then immediately save the CFWS on their computer. 3. Click “enable editing” to show data and enter inputs.

4. Once completed, the final version of the CFWS is to be uploaded into SNCnet using the “Upload” link in the

Financial Analysis tab. 5. When edits are needed to the CFWS after uploading once again click the “Download Worksheet” link to

download and open the previously completed CFWS. 6. Complete steps 2 through 4 above once changes are made.

There is an E-learning tool that is an interactive session on the above.

Data Input Instructions

The majority of the information comes directly from the bank provided Engineering Report. All Data is to be entered in thousands. NOTE: Purple cells require examiners to input data or the CFWS cannot be uploaded to SNCnet. In almost all cases there will be a value for all required Purple cells in engineering reports. However, in a small number of cases there may not be a value. Required Purple cells with no available data from engineering reports need to have a “0” entered in that cell. The most likely cases where entering “0” is required are when there is no Hedge or PUD value for a borrower.

Steps 1 & 5 Step 4

Click here

1Q 2020 Exam Page 75 of 87

Yellow cells must be completed if data is available and entering “0” is not required for Yellow cells without data to input. Colors will clear with input. Outstanding Bal Repayment Test Tab

Row #s Instructions / Comments 5 • Requested information in columns is self- explanatory. 7 • Enter in Column E the borrowing based commitment.

• Beginning cash from the most recent financial Statement (FS). • Report Effective Date is the Engineering Report as of date.

 Typically located in top center of the economic summary tables.

At the top of each column there is a red mark in the top right-hand corner that will explain to the user what data goes in the particular cell or column. Totals for each column in the worksheet should tie back to the related column totals in the Engineering Report and should be completed as follows:

Data from Bank Engineering Report

Considering the number of columns, to assist examiners for data input sections the complete screen shot of the respective section is split in two screenshots below for easy reference to instructions.

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Columns B - I

Rows 11 – 33 Column Instructions / Comments

B Automatically filled in based on the effective date on the Engineering Report (row 7 “Report Effective Date”) cell to be input at the top of the worksheet.

C Is filled in with data from the Net Sales column in the Engineering Report. These are gross revenue amounts that are not discounted or risked. • Sourced from the bank's engineering economic tables using current market pricing (NYMEX curves)

and un-risked reserves. • Additionally, the reserve set should include total proved reserves without limitation with respect to

PNDP and PUD. D Is filled in with the estimated Hedge value based on the most current information available. This data is

usually supplied by the bank analyst. • Hedging revenue forecasts should be based on current market pricing (NYMEX curves). • May be sourced from either a separate engineering case for hedge positions, or from the credit

analyst hedge valuation forecast. F Is the Lease Operating Expenses found in the Engineering Report column identified by the same or

similar name. • LOE, or lifting costs, are typically detailed as a separate column of data within the engineering tables.

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Rows 11 - 33 (continued) Column Instructions / Comments

G Are the taxes due from the estimated production from the wells. This information may be listed in two columns in the Engineering Report and will need to be totaled for each year. • Production, Severance, and Ad Valorem taxes are typically detailed as three separate columns of data

within the engineering tables. These taxes should be aggregated and entered in this column. H CAPEX should come from information supplied by the borrower on their estimated drilling program. This

column is usually titled Investment Capital in the Engineering Report. • CAPEX is typically detailed as a separate column of data within the engineering tables, and can be

titled "Capital Expenditures" or "Capital Investment." • The majority of these costs are typically associated with the development of PUD wells.

CAPEX can also include conversion of PDNP wells to production and the work-over of existing PDP wells. Columns J - P

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Rows 11 - 33 (continued) Column Instructions / Comments

J Represents the amount of CAPEX that is funded by the borrower's liquidity (beginning cash). K Can be derived based on a percentage of revenue in column two. The bank may have pro forma

amounts for this column. The percentage of revenue is usually in the 10 – 15% range. The appropriate percentage may also be obtained from the bank’s analyst. • G&A expenses should be based on bank projections (typically forecast by the credit analyst) and

should be consistent with the borrower's history. L Enter any other recurring expenses, required distributions, or mandatory debt repayment. M Estimated interest expense based on beginning year debt and user entered interest rates for each year. N Represents the positive cash flow available for debt service, or the negative cash flow deficit that is

funded by a draw against the RBL up to the borrowing base commitment, or by issuance of junior debt. O Represents the total cash flow available for debt repayment remaining at year end. P Represents the amount of borrower liquidity (beginning cash and RBL availability) remaining at year

end after funding CAPEX.

Repayment Test Section

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Columns B - J

Rows 37 - 58 Column Instructions / Comments

B Automatically filled in based on the effective date on the Engineering Report (row 7 “Report Effective Date”) cell to be input at the top of the worksheet.

C Fill in the appropriate interest rate. The user may keep a constant interest rate or may show increases and declines in interest rate as deemed appropriate. The interest rate expense will automatically be calculated once the beginning RBL balance to the right is input. • Enter the current interest rate for the RBL. Sensitivity analysis can be performed by comparing

stable interest rates to rising interest rates D • Enter the blended rate for junior secured debt. E • Enter the blended rate for all unsecured debt. F • Enter the outstanding balance of the RBL – Row 36 only. G • Reflects repayment of the RBL with all excess cash flow. Cash flow deficits per year are funded up to

the borrowing base commitment, with any additional deficit funded by additional junior debt. H Reflects the projected year ending RBL balance. I Enter the total balance of all other secured debt. J Reflects repayment of junior secured debt with all excess cash flow once the RBL is fully repaid. Cash

flow deficits per year are first funded up to the borrowing base commitment, with any additional deficit funded by additional junior secured debt.

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Columns K - S

Rows 37 - 58 (continued) Column Instructions / Comments

K Represents ending junior secured debt. L Enter the balance of unsecured debt, including bonds – Row 36 only. M To the right of the unsecured debt balances, the unsecured debt maturities should be input in the

appropriate year. • Enter the amount of maturing unsecured debt in the appropriate year based on the maturity

schedule. N Represents the beginning year balance of unsecured debt maturing before secured debt repayment. O Reflects repayment of the portions of unsecured debt maturing before secured debt repayment.

Application of excess cash flow for repayment occurs following repayment of the RBL and secured debt.

P Represents ending junior secured debt. Q Represents the projected amount of total FNR remaining at the end of each year. R Represents the running cumulative percentage of FNR generated each year. S Represents the percentage of FNR remaining at the end of each year, by dollar.

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Repayment Analytics

Rows 63 – 85 Column Instructions / Comments

B Automatically filled in based on the effective date on the Engineering Report (row 7 “Report Effective Date”) cell to be input at the top of the worksheet.

C Represents the cumulative FNR generated in each year. D Represents the point in time when half of the FNR has been generated. E Represents the point in time when 60% of the FNR has been generated. F Represents the point in time when 75% of the FNR has been generated. G Represents the point in time when 90% of the FNR has been generated. H Represents the point in time of RBL payout. I Represents the point in time payout of junior secured debt after RBL payout. J Represents the point in time payout of unsecured secured debt maturing prior to repayment of total

secured debt. K Represents the dollar amount of FNR remaining in each year following RBL payout. L Represents the dollar amount of FNR remaining in each year following total secured debt payout. M Represents the dollar amount of FNR remaining in each year following total secured debt and maturing

portions of unsecured debt payout. N Estimated RBL to EBITDA ratio at each year. Denominator considers Cash Flow Available for Debt

Service plus Interest Expense and CAPEX. O Estimated Total Debt to EBITDA ratio at each year. Denominator considers Cash Flow Available for Debt

Service plus Interest Expense and CAPEX.

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Rows 89 – 117 Column Instructions / Comments

Repayment FNR D Represents the cumulative dollar amount of FNR generated at each point in time. E Represents the dollar amount of FNR remaining at each point in time. F Represents the percentage of FNR remaining at each point in time, by dollar amount. G Represents the cumulative percentage of FNR in dollars used to repay RBL and total debt.

Repayment Years B: row 97 Point in time (years) when RBL repayment occurs. B: row 98 Point in time (years) when total secured debt repayment occurs. B: row 99 Point in time (years) when repayment of junior secured debt, plus maturing portions of unsecured

debt, occurs. Risk Rating Indicators

D Point in time, in years, when the respective percentage of FNR dollars has been generated. E • Indicates whether the RBL repayment occurs at each respective point in time.

• "Possibly" indicates the respective percentage economic life occurs beyond 20 years and remaining FNR exceeds the debt balance.

F • Indicates whether total secured debt repayment occurs at each respective point in time. • "Possibly" indicates the respective percentage economic life occurs beyond 20 years and remaining

FNR exceeds the debt balance. G • Indicates whether total secured debt, plus maturing portions of unsecured debt, repayment occurs

at each respective point in time. • "Possibly" indicates the respective percentage economic life occurs beyond 20 years and remaining

FNR exceeds the debt balance.

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Full Commitment Repayment Test Tab

No data needs to be entered in this tab as it extracts data entered in the Outstanding Bal Repayment Test tab. However, review the tab to ensure fields have been populated; if not talk with exam team leadership to resolve. Summary Results Tab

This tab will indicate a possible rating and the economic life of the reserves.

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Rows 4 – 23 Column Instructions / Comments

E: row 15 • Select whether the senior secured RBL and junior secured debt are pari-passu in the right of payments per the loan agreement. Options are: Yes, No, N/A.

• This may affect the suggested rating for the RBL. E: row 16 • If the borrower has significant unfunded availability on the RBL (typically exceeding their projected

CAPEX,) and they are not anticipated to draw up the RBL for other reasons (planned acquisitions, fund dividend or cash out, etc.) then select “No”.

• Selecting “Yes” defaults the “Potential Risk Rating” section below to use the “Full Commitment Approach” while selecting “No” defaults to the “Outstanding Balance Approach”.

I: rows 8 - 11

• Totals for each type of reserve (PDP, PDNP, & PUD) should be input based on the PV values (usually PV9).

• Enter the NPV of the reserve categories using current market price. • Required fields must have a number. Thus if none enter “0”.

I: rows 8 - 11

Enter risk adjustment factors / rates used by the bank in their reserve valuation.

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Asset-Based Cash Burn Worksheet Job Aid The ABL Cash Burn Worksheet (ABL CBWS) is an optional tool to assist Examiners in situations where cash burn calculation is relevant.

Objective

The objective of the ABL worksheet is to provide a tool to determine whether the borrower has sufficient total liquidity to fund operations and/or meet seasonal working capital needs.

Procedures to Access and Save the ABL CBWS in SNCnet

The ABL CBWS can be added within the Financial Analysis tab when Examiner chooses to complete the tool. Steps to access in SNCnet are as follows:

1. Go to “Other Action” within the Financial Analysis tab. 2. Chose “Add Cash Burn Worksheet” 3. Reason for adding chose “CFW used for analytical purposes only” 4. Available options are to “Open,” “Save,” or “Save As.” Choose to “Save” the CFWS to your computer. 5. Click “Enable Editing” to show data and enter inputs. 6. Once completed, the final version of the CBWS is to be uploaded into SNCnet using the “Upload” link in the

Financial Analysis tab.

Data Input Tab Instructions

• Purple cells require examiner data input; otherwise, the CFWS cannot be uploaded. There are only two required fields on the ABL CFWS: Latest FYE Statement Held and TTM/Interim Financial Statement dates. The date entered on cell B8 must be equal to or greater than the date entered on cell B7.

• Yellow cells should be completed if data is available. Colors will clear with input.

1Q 2020 Exam Page 86 of 87

Annual or Quarterly Data Input Selection

• Select Annual or Quarterly data in cell B12. • DO NOT SWITCH BACK AND FORTH BETWEEN USING A QUARTERLY OR ANNUAL SELECTION IN CELL B12

Row #s Instructions / Comments All Data Input all data in US $ & in thousands.

Obligor Name and Review Bank Name will be automatically populated in the worksheet. If borrower financials/bank projections are in foreign currency, examiners must convert the foreign currency to US $ on the CFWS. A document will be uploaded to the Help section of SNCnet which details the conversion rate to be utilized for all major currencies. That same conversion rate should be used for Actual, TTM, and Projected periods. The currency rate conversion dates are: for the 3Q exam - June 30th, and for the 1Q exam - December 31st. TTM (column C) may also be referred to by the bank as LTM (Last Twelve Months). TTM data should be for the most recent interim financial statement (FS) date. If necessary to calculate this data, please refer to the LL CFWS Job Aid Instructions.

13-24 Source documents are the Balance Sheet, Income & CF Statements (Actual: Columns B & C); Base Case projections and Borrowing Base Certificate, and/or bank-specific ABL monitoring report (Projections: Cols. D-K)

13 Unrestricted Cash and cash equivalents (not subject to any lien in favor of any creditor or internally earmarked for specific use): The primary source document for this information is the Balance Sheet; however, examiners must review the Notes to the Financial Statements for additional information concerning any restricted cash balances.

15-19 Excess ABL Availability is calculated as the lesser of the committed exposure or current availability under the borrowing base minus Outstanding RLOCs & LCs and Hard Blocks. A hard block is a covenant used in an ABL revolver that establishes a minimum amount of excess availability that must be maintained at all times. Source documents for determining the amount of the hard block include the most recent Borrowing Base, the Credit Agreement, and/or the most recent Internal ABL Monitoring Report prepared by the bank.

21 Total Estimated Liquidity Available is equal to Unrestricted Cash plus Excess ABL Availability. 24 Adjusted EBITDAR equals Adjusted EBITDA + Rent Expense (include if significant). For detailed

instructions on EBITDA adjustments, please refer to the LL CFWS Job Aid. 29-34 & 38 For all categories under Cash Flow Needs/Fixed Charges, please see LL CFWS Job Aid. Source

documents include the Statement of Cash Flows from the financial statements, and the Notes to the Financial Statements.

43-46 Cash Burn is commonly calculated as the difference between cash inflows and cash outflows for a specified period, though the calculation and adjustments may vary by borrower and by bank. A negative amount indicates that the borrower is burning cash. Examiners should carefully assess the borrower’s seasonality, operating cycle, and stages of the business cycle (growth, peak, recession, recovery).

50-51 Current Cash Burn Coverage (reported in months) equals (Total Estimated Liquidity Available / Examiner Calculated Cash Burn) x 12. Projected Cash Burn Coverage equals (Total Estimated Liquidity Available [Current Period] / Examiner Calculated Cash Burn [For the Following 12-Month Period]) x 12. NOTE: Examiners should consider whether forecasted balance sheet liquidity and excess availability under the borrowing base are sufficient to cover projected cash burn and other liquidity needs over the next 12 to 18 months. A borrower that does not maintain sufficient liquidity coverage of cash burn will likely be subject to an adverse credit risk rating.

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Row #s Instructions / Comments 57-64 The CFWS will calculate the Days Turnover for AR, INV, and Accounts Payable (on either a quarterly or

annual basis) based on the examiner’s input of the asset levels for a given period. The source documents for these items are the Balance Sheet and Income Statement. Note: Examiners should address the cash conversion cycle and document their analysis of the turnover metrics in the PSOR section and Voter Ratings sections of the SNCnet linecard. Deteriorating trends in turnover ratios should direct the examiner to carefully review the most recent field audit and note the reasons for the deterioration.

Asset-Based Cash Burn Worksheet Job Aid

Table of Contents Job Aid 1Q2020FINAL
Linecard Job Aid 1Q2020FINAL

SNC Exam Line Card Documentation Job Aid

Help Documents
Helpful Tips
Line card Attachments
Line card Documentation Objectives
Review Bank/Obligor

Background

Deal Structure
Company Information
Business Operations
Competition/Position within Industry
Third Party Ratings

Co-Obligors
Sponsors
Internal Rating

Credit Facilities

Payment Schedule and Detailed Repayment Schedule
Ratings

Lender Protection

Guarantors
Collateral
Covenants
Enterprise Valuation (EntV)

Financial Analysis

Conclusion
Repayment Capacity from Primary Source
Repayment Capacity from Secondary Source
Performance to Plan
Leverage
Liquidity

Management/ Surveys

Discussions with Management
Risk Management
Transaction Structure

Incremental Facilities
Loan Covenants

Stress Testing / Sensitivity Analysis
Refinancing Risk
Surveys

QA
Voter Ratings
Write-up
Signoff
Appendix

Linecard Job Aid ABL SUPP 1Q2020FINAL

Asset-Based Loan Line Card Documentation Job Aid

LL CFWS Job Aid 1Q2020FINAL

Leveraged Loan Cash Flow Worksheet Job Aid

Objective
Multiple CFWS

Full CFWS
Abbreviated CFWS

Procedures to Access and Save CFWS in SNCnet
Incorrectly Flagged Leveraged Lending (LL) Borrowers
Obligor Name Change
Expectations and Common Issues for Base Case Projections
Additional CFWS for Analytical Purposes - Full CFWS
Data Input Tab Instructions - Full CFWS

Comments and Clarification
Revenue / EBITDA
Debt
Changes in non-cash Working Capital (WC) Assets
Cash Flow Needs
Capital Expenditure (CAPEX)
Free Cash Flow (FCF)
Liquidity
Comments and Clarification (Examiner Notes) - Columns
EBITDA Adjustments by Categories

Data Summary Tab Instructions - Full CFWS

Repayment Capacity Ratios
Repayment Capacity

Data Input Tab Instructions - Abbreviated CFWS
Data Summary Tab Instructions - Abbreviated CFWS

OG CFWS Job Aid 1Q2020FINAL

Oil and Gas Cash Flow Job Aid

Objective
Procedures to Access and Save CFWS in SNCnet
Data Input Instructions
Outstanding Bal Repayment Test Tab

Data from Bank Engineering Report
Repayment Test Section
Repayment Analytics

Full Commitment Repayment Test Tab
Summary Results Tab

ABL CBWS Job Aid 1Q2020FINAL

Asset-Based Cash Burn Worksheet Job Aid

Objective
Procedures to Access and Save the ABL CBWS in SNCnet
Data Input Tab Instructions