The conversation around PPP borrowing took an ominous turn on Tuesday evening, amid a growing backlash at larger, well-capitalized companies who have received PPP loans. At the daily White House press briefing, Treasury Secretary Mnuchin noted that the PPP program was not intended for such companies and that “there are severe consequences” for PPP borrowers who have improperly certified their need for the PPP funds.
The transcript at CSPAN really doesn’t quite do justice to the tone or substance of his remarks, so the video here at Politico is worth watching to get a sense for what seems like a dramatic shift in the PPP political conversation. Here are some key points:
- Secretary Mnuchin refers several times to the importance of the “certification” that borrowers must make. He notes that Treasury and SBA will be putting out an FAQ to “explain the certification.” He is referring to the certification that all PPP applicants must make in the PPP loanapplication that “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” (emphasis added).
- He reminds “people [to] just make sure – the intent of this was for businesses that needed the money … not for big public companies that have access to capital.” (It seems that similar logic may apply to private-equity backed companies as well, especially given the prevailing public sentiment.)
- He goes on to say: “Certain people on the PPP [i.e., borrowers] may have not been clear in understanding the certification. We will give people the benefit of the doubt. … If you pay back the loan right away, you won’t have liability to the SBA and to Treasury. But there are severe consequences to people who don’t attest properly to this certification.”
Senator Rubio also announced yesterday that his Senate Small Business Committee “would conduct aggressive oversight“ of the PPP, adding:
“We also have multiple reports of companies abusing the program.
Any business, regardless of size, must certify it has been harmed by the coronavirus crisis and that PPP is necessary to maintain operations,”
It now appears that this emphasis and oversight may have been an unannounced part of the deal with congressional Democrats that was necessary to obtain the approval for the upsize. Thus the certification of need becomes critical. (I don’t place as much weight on Rubio’s statement re certification of “harm” because he has tended to use words that are a little inconsistent with what the regs actually require, but it may still be instructive into what we might see in the FAQ.)
We await these new FAQ around this certification of need and possibly the consequence for an improper certification and will provide updates as they come out. In the meantime, potential PPP applicants may be well advised to tread even more carefully in deciding whether to apply for PPP loans. PPP applicants who have been approved for a loan may want to consider whether to accept disbursement of that approved PPP loan. Finally, PPP borrowers should consider reserving their PPP loan proceeds, pending review of such guidance. It appears that there will be enhanced scrutiny on, thus risk for, PPP borrowers who:
- Are public companies;
- Are large enterprises or getting a large PPP loan; and/OR
- Who have access to other sources of capital (such as untapped revolvers and perhaps even existing private equity backing).
Many of you may balk at that last statement, recalling that the CARES Act eliminated the traditional SBA “no-credit elsewhere” requirement. As background, the PPP loans are an outgrowth of the traditional SBA 7(a) loan program for small businesses, which has traditionally required that 7(a) borrowers make a so-called “no-credit elsewhere” certification. The actual regulation however makes it clear that this does not literally mean that the borrower could NOT obtain funds at any cost, just that:
“the desired credit is unavailable to the applicant on reasonable terms and conditions from non-Federal sources without SBA assistance, taking into consideration the prevailing rates and terms in the community in or near where the applicant conducts business, for similar purposes and periods of time. “
The CARES Act eliminated this no-credit-elsewhere requirement for the PPP loans, in favor of the new certification that the loan is “necessary to support the ongoing operations of the applicant.” It now appears that SBA and Treasury are going to place a critical focus on that “necessary” certification. This may meant that they effectively revert to something close to the existing SBA 7(a) approach of looking at what other funding options were reasonably available to the borrower outside the PPP program. (See below* for a short note that a similar concept may apply to the Main Street facilities.)
All of this follows a media feeding frenzy on publicly-available information on PPP borrowers: WSJ, CNBC, AP and other media outlets scoured 8-K filings to create lists of more than 100 public companies who have received more than $380M in PPP loans. In his remarks, Secretary Mnuchin praised Shake Shack for returning the full $10M PPP loan that it received and, as noted above, stated that other borrowers should consider doing the same.
The Shake Shack decision came before that warning shot was fired and as the company was facing severe criticism for taking the loan while essentially simultaneously closing a $150M equity offering. But, to be fair, Founder and CEO Danny Meyer also noted that “The PPP came with no user manual and it was extremely confusing” (amen, brother, amen).
However, the media and public scrutiny will not end with public company borrowers like Shake Shack. As we predicted last week, WSJ reported that it had already filed a FOIA request with SBA, asking for the names of all PP borrowers and their loan amounts. For now, SBA has said that it is too busy to provide such disclosure (perhaps understandably). However, the SBA response letter posted by WSJ seems to indicate that such public disclosure is coming:
“In the future, we [SBA] will be able to turn our efforts to providing loan specific data to the public … . This information will be added to the SBA.gov website as it becomes available.” (emphasis added)
(Ironically, SBA separately informed EIDL applicants that, due to a glitch in the EIDL application portal, the personal data of more than 8,000 EIDL applicants may have been inadvertently exposed to other applicants in that portal).
Of course, it is not just borrowers and SBA who are dealing with PPP headaches. The inevitable tsunami of litigtation against PPP lenders has begun as well. Bank of America, JPMC, U.S Bank and Wells Fargo were sued in cookie-cutter class action suits, alleging that:
“Each bank “concealed from the public that it was reshuffling the PPP applications it received and prioritizing the applications that would make the bank the most money,” according to language appearing in all four of the class-action lawsuits, filed Sunday in the U.S. District Court for the Central District of California.” (emphasis added)
So, all of that is a long report on a day when we still did not receive the forgiveness guidance, even as borrowers must now make decisions on how to spend their PPP proceeds. We will continue to monitor for that guidance as well as the new “certification” FAQ that Secretary Mnuchin promised.
*Note that similar concepts may apply to the Main Street liquidity program, due to the requirements of Section 13(3) of the Federal Reserve Act which require the Fed to determine that borrowers in programs such as that are “unable to secure adequate credit accommodations from other banking institutions.” In its recent FAQ on the Commercial Paper Funding Facility (CPFF), the Federal Reserve Bank of New York described this standard in terms very similar to the applicable SBA reg noted above:
“The New York Fed must obtain evidence that participants in the Facility are unable to secure adequate credit accommodations from other banking institutions. …
In certifying whether the issuer is unable to secure adequate credit accommodations from other banking institutions, issuers may consider economic or market conditions in the market intended to be addressed by the CPFF as compared to usual ones, including the availability and price of credit.Lack of adequate credit does not mean no credit is available. Lending may be available, but at prices or on conditions that are inconsistent with a normal, well-functioning market.”
We have reviewed the LSTA, ACG and other comment letters to the Fed on the Main Street program, and will report on those shortly, but this was already too long as it is.