PPP Application Issues; Updated PPP Volume

Good morning.  No meaningful updates overnight.  Treasury and SBA did again update their FAQ at some point late yesterday, but the changes are only in FAQ #1, which was originally posted on April 3, and mainly reinforce the point made yesterday that it is the responsibility of the borrower and not the lender, to get the calculations right (in this case re payroll).   

Some interesting information in a report in the American Banker (behind a paywall, sorry):

  • Lenders have submitted* 266,000 applications for $71B in loans
  • SBA indicates that lenders are required to provide borrowers with funds with five days of receiving an SBA loan number, which is issued when a loan application is submitted* to the SBA;
  • SBA also said that it will not promulgate a form of PPP note and that each bank may use its own form, which will likely be the next frantic action item as lenders must prepare and circulate forms of notes within that 5-day window; and
  • As you no doubt saw elsewhere, Congress and Secretary Mnuchin are working to add another $200-250M to the PPP fund, perhaps as early as Thursday. 

*I believe that when SBA says an application is “submitted”, it means that the application has been properly submitted and thus effectively approved for a loan.

A few updates on what we are seeing in the market and questions that we are getting:

  1. Most importantly, we are getting questions from borrowers who are not planning to use the loan proceeds for “payroll costs”.   That is NOT PERMITTED under the IFR.  Although the CARES Act provides that loan forgiveness is conditioned on using proceeds only for permitted purposes, the IFR goes further and requires that Borrowers use 75% of the loan proceeds for payroll costs.  See page 16 of the IFR:

“However, at least 75 percent of the PPP loan proceeds shall be used for payroll costs. For purposes of determining the percentage of use of proceeds for payroll costs, the amount of any EIDL refinanced will be included. For purposes of loan forgiveness, however, the borrower will have to document the proceeds used for payroll costs in order to determine the amount of forgiveness. While the Act provides that PPP loan proceeds may be used for the purposes listed above and for other allowable uses described in section 7(a) of the Small Business Act (15 U.S.C. 636(a)), the Administrator believes that finite appropriations and the structure of the Act warrant a requirement that borrowers use a substantial portion of the loan proceeds for payroll costs, consistent with Congress’ overarching goal of keeping workers paid and employed. As with the similar limitation on the forgiveness amount explained earlier, the Administrator, in consultation with the Secretary, has determined that 75 percent is an appropriate percentage that will align this element of the program with the loan amount, 75 percent of which is equivalent to eight weeks of payroll.”

  • We know of at least one lender who has interpreted this to mean the borrower must certify that it will use the funds for permitted  purposes within the first 8 weeks after closing.  We understand that some borrowers are looking to borrow a PPP loan without necessarily having it forgiven and plan to  spend the funds for permitted purposes after the 8-week period.  The CARES Act says that “during the covered period [Feb 15 – June 30] an eligible recipient mayuse” the proceeds for the permitted purposes, and then the IFR imposes the 75% requirement above. 
    • It does not appear that there is a strict requirement that all proceeds be spent during the covered period.  It likely would be a strained (but not impossible) interpretation to read the nonrecourse exception to apply where a borrower uses the loan for permitted purposes beyond the covered period.  (The CARES Act says the PPP loan is nonrecourse “except to the extent that such shareholder, member, or partner uses the covered loan proceeds for a purpose not authorized under clause (i)”.)
    • However, borrowers who are intending to borrow a PPP loan while keeping operations shuttered or at greatly reduced levels may run a real risk of challenge to the certification that the loan is “necessary .. . to support the ongoing operations” of the borrower.  At the risk of stating the obvious, ongoing operations likely means what it says.   In light of the high demand for, and likely inadequate supply of, PPP financing, borrowers should tread carefully here.
  • Despite the guidance in yesterday’s FAQ, many lenders continue to insist on borrower ownership information for owners who aggregate to at least 51%, or for one lender 90%, of a borrower’s equity.  Some lenders are saying that this is being required by SBA.  Our Policy team is trying to gain insight and possibly assist on this.
  • A few of you have asked about “irrevocably” waiving control rights merely for the duration of the PPP loan.  Unfortunately, we believe that by analogy to SBA interpretations in other contexts, “irrevocably” means “permanently” without any sort of right (express or via “handshake”) to reinstate the control right in the future.   For investors not wanting to give companies unfettered rights, it may be possible in deals with multiple investors to amend the charter or agreement to lower the voting threshold so that no single investor (or group of affiliated investors) controls the vote.
  • Finally, we understand some companies are suggesting that because the “alternative size standard” (of $5M NI and $15M TNW) is not expressly mentioned in 121.301(a) that means that borrowers need not apply the affiliation rules to the that standard.  While the alternative standard is not mentioned there,  SBA SOP 50 10 5(K) in Section B.II.D.4 (page 92) captures it:

“4. The Applicant business may qualify under either the industry small business size standards or the alternative size standard. To qualify under the alternative size standard, the Applicant (including affiliates) must meet the following:

a. The maximum tangible net worth may not exceed $15 million; and

b. The average net income after Federal income taxes (excluding any carry-over losses).”

That’s all for this morning.  Please let us know what you are seeing and hearing from lenders and, as always, let us know if we can help. 

We hope that all of you are safe and healthy and for those of you celebrating Passover today, Chag sameach