NEW IFR 7 Imposes $20 Million Limit on PPP Loans Across Subs and PE Portfolio Companies

BREAKING … This one is important for PE sponsors and companies with multiple borrowers.   SBA has just released a NEW “Interim Final Rule on Corporate Groups and Non-Bank and Non-Insured Depository Institution Lenders” (IFR 7) that limits the maximum amount of PPP loans made to multiple entities within a single “corporate group” to $20M.

·       Although IFR 7 refers to a “corporate group,” its scope will pick up majority-owned portfolio companies of many PE funds, and thus subject them to the new $20M cap.

·       IFR 7 does NOT use the affiliation rules to define a corporate group, instead saying that “businesses are part of a single corporate group if they are majority owneddirectly or indirectly, by a common parent.”  

o   The good news is that this is generally a narrower standard than the affiliation rules, which pick up some minority investors with control rights.

o   The less good news is that, this common-parent standard applieseven if the borrower entities are exempt from affiliation.   Thus, even those portfolio companies with SBIC investments or that are franchisees or in NAICS 72 must be aggregated for this purpose. (In fact it appears intended to address the AuotNation, Ruth’s Chris and, perhaps Ashford, situations where a corporate chain was exempt from affiliation and borrowed across multiple subsidiaries.)

·       The term “common parent” is NOT defined.  It almost certainly will include a single PE or other fund entity, but might not requireaggregation across:

§  Separate fund entities, even if managed by the same management company, assuming that no LP has a majority of the LP interests (e.g., Fund III portfolio companies might not be aggregated with Fund IV portfolio companies for this purpose, even though they might be “affiliates” for the SBA size standard analysis)).

§  Separate alternative investment vehicles (AIVs), SPEs or SPVs used by funds for UBTI blocking other purposes.

§  However, to the extent that such entities have the same entity serving as GP or managing member, it is possible that SBA could provide further guidance that such entity would be deemed to be the “parent”.  I am hoping that is unlikely. 

·       IFR 7 applies to all loans that have not been fully disbursed as of today (April 30).  It does NOT appear to apply retroactively to PPP loans that have already been fully disbursed.

·       It is the responsibility of borrowers and applicants to notify their lender(s) if they have applied for or received PPP loans in excess of the limit, and they must withdraw or cancel pending applications to get back under the limit.  

o   It does not specify how such applicants should choose which loans to cancel or whether business can partially reduce multiple PPP applications in order to allow each borrower to get a smaller PPP loan that would together be less than $20M.  

o   Also, if a group has received some loans and also has pending applications, IFR 7 does NOT appear to allow borrowers to repay those existing PPP loans in whole or in part and still proceed with pending PPP loans to spread the proceeds across current and pending borrowers.  

o   However, all of these approaches would seem to be keeping with the spirit of this new limit and may be feasible.

·       Failure by a PPP applicant or borrower to comply with the $20M cap will be “regarded as a use of PPP funds for unauthorized purposes and the loan will not be eligible for forgiveness.”   

o   It is NOT clear whether SBA intends for the lack of forgiveness to be the exclusive remedy for being over the cap. 

o   Even aside from other SBA remedies, keep in mind that many of the PPP promissory notes that we have seen create an event of default if proceeds are used improperly, so borrowers who are over the $20M cap may be in default and their loans thus subject to acceleration by their lenders.  Such a default would likely trigger a cross default to most other existing debt of the “corporate group”.

IFR 7 (SEVEN!) contains other provisions, but I was afraid to ask “What’s in the box?”.   Fortunately one of our partners looked and advised that the balance of IFR 7 merely lowers the $50M prior-lending threshold to enable the non-bank lenders who meet the following tests to become PPP lenders:

·       Have originated, maintained, and serviced more than $50 million in business loans or other commercial financial receivables during a 12-month period in the past 36 months, or

·       Have originated, maintained, or serviced more than $10 million in business loans or other commercial financial receivables during a 12-month period in the past 36 months, if the non-bank lender is (1)CDFI or (2) a majority minority-,women-, or veteran/military-owned lender.

P.S.  Still no forgiveness guidance.