First, the good news. The House of Representatives approved the PPP 2.0 upsize bill, which now heads to the President’s desk for signature, likely tonight. It’s not yet clear when SBA will reopen the application portal. Barrons had a report that the SBA portal may reopen at 12:01 a.m. on Friday, but that seems to be unconfirmed. Stay tuned.

On the less happy front and as most of you have seen, SBA issued the FAQ (#31) that Secretary Mnuchin promised at the press briefing on Tuesday, which says in the most relevant part:

Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere … , borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.“ (emphasis added)

Some key takeaways:

• The FAQ refers to a need due to “current business activity”, which is a more restrictive standard that the “current economic uncertainty” standard in the CARES Act and form of application. Unless we are talking about Schrodinger’s cat, “uncertainty” would seem to imply something beyond the current moment and allow for some forecasting of future and, yes, uncertain harm. By referring only to “current business activity” in today’s FAQ, it appears that SBA may expect borrowers to be able to demonstrate that the pandemic has already impacted their business, not just that there might be, or even will be, future impacts. This seems consistent with Senator Rubio’s statement that each borrower “must certify it has been harmedby the coronavirus crisis” (note the use of the present perfect tense).
• The FAQ seem to be fighting yesterday’s battle somewhat by addressing the “Shake Shack issue” regarding large public companies, but that is just an example and is not limiting. The specific language of the FAQ requires borrowers to consider theiraccess to other sources of liquidity. Yes, this is largely inconsistent with the CARES Act waiver of the traditional SBA “no creditelsewhere” requirement, but note the difference between “other sources of liquidity” and “credit elsewhere”. Notably, equity capital is an “other source of liquidity” but is not “credit elsewhere”. SBA could be signaling that an equity infusion should be considered as a source of liquidity. (Shake Shack, after all, raised equity capital). Thus, this language should give pause to companies with:
  • Significant cash on hand;
  • Large undrawn revolver availability; and/or
  • PE, VC or other well-capitalized equity investors who (in theory at least) could be a “source of liquidity” to the company’s balance sheet.

While that last point may be controversial, consider that the traditional SBA affiliation rules were originally seen as excluding many PE and VC portfolio companies from the PPP program. Despite a strong lobbying effort and a push from Nancy Pelosi and Kevin McCarthy, SBA did NOT loosen those affiliation rules to help such companies. This current guidance could be taken as another somewhat indirect signal that such portfolio companies are not the intended recipients of these loans. We think that is probably an overly restrictive reading of the situation, but investment funds and their portfolio companies should be prepared to respond to a higher level of scrutiny on their need for a PPP loan.

• It’s not clear what “significantly detrimental to the business” means, but it likely is referring to what we discussed on Tuesday night, that the SBA regulations make 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. “

• Although FAQ #17 notes that borrowers may rely on the guidance that was in effect at the time that they applied for their PPP loans, SBA now clearly intends for this new guidance to trump any prior guidance or interpretation. The FAQ provides that a borrower who “applied for a loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.”
  • Note that some PPP loan documents require borrowers either to provide 21 days advance notice of prepayment or to pay 21 days of interest (i.e., a 3-week make whole), along with any interest accrued prior to the date of the notice. That’s not a big expense, but check your loan docs, keep this in mind and double check your math if you elect to repay your loan to ensure that you do in fact repay the loan in full by May 7.
  • Borrowers wanting to prepay a PPP loan should also closely read any consent or waiver documents from their pre-existing incumbent lenders who may have required such borrowers to maximize, and apply for, forgiveness of their PPP loans.

• The FAQ again exempts lenders from responsibility here, saying again that lenders may rely on the borrower’s certification.

Keep in mind that Secretary Mnuchin warned of “severe consequences” for borrowers who made an improper certification and that Senator Rubio promised “aggressive oversight” from congress into the PPP loans. As we noted earlier:

• Because of FOIA and the SBA’s own statements, borrowers should be prepared for all of their loan details to be made public.
• The government seems to be again adopting its “pay and chase” approach from the 2008 crisis, where it is letting the money go out now and then standing ready to second guess borrowers’ exigent decisions in the harsh light of morning with perfect hindsight

We know of many PE-backed companies who seem to tick every PPP box. If those borrowers go into the process with “clear eyes,” understanding the requirements and the risks, and a “clean heart,” making the required certifications in good faith and using the PPP loan proceeds for their intended purposes, I wouldn’t say that they “can’t lose” but they seem likely to successfully withstand any legal or regulatory scrutiny on those loans. (Apologies to a great coach for borrowing and changing that line). However, those can be expensive fights to win. Further, for some borrowers and funds, the reputational or headline risk could be the more significant factor.

The practical effect of this seems unfortunate for many employees of public companies and other companies with access to liquidity. Many such companies likely would have made layoffs or similar actions but for getting a PPP loan, and are now faced with the choice of either accepting the risk of being second-guessed and keeping the PPP loan and their workforce or returning the PPP loan and proceeding with the very reductions in force that the PPP loans were intended to mitigate. In theory of course, those returned PPP loan proceeds could be available to other (likely smaller) borrowers who could keep their employees on payroll, but it is not clear whether PPP loans repaid prior to May 7can be “recycled” by SBA under the $659B cap. If those proceeds cannot be recycled and loaned to other borrowers, then the benefit of such loans is simply lost, which seems like an unintended and unnecessary hardship for both businesses and their workers.