First some good news, Dan Primack at Axios reported this morning that an SBA spokesman told Axios that “declined loans and returned disbursed funds from either round can be reused in this tranche of funding.” That just about covers the good news from SBA. Apparently unable to increase the bandwidth of the E-Tran system, SBA blocked all but the smallest banks from accessing the portal for about 8 hours on Wednesday, which appears to be both unprecedented and perhaps unsupported by clear regulatory authority. The program also is embroiled in more than a dozen lawsuits challenging SBA’s exclusion of bankrupt borrowers from getting PPP loans.

On the regulatory front, there is still no helpful guidance on forgiveness, but we did two newFAQ today:

FAQ #38 clarifies that an eligible business that was operating on Feb 15, 2020 but has since had a “change in ownership” is still eligible for a PPP loan.

• This applies to both stock and asset deals, even if the change in ownership results in a new EIN and even if the buyer itself was not in operation on Feb 15.
• Further, if the buyer “has maintained the operations of the pre-sale business” then the buyer “may rely on the historic payroll costs andheadcount of the pre-sale businessfor the purposes of its PPP application, except where the pre-sale business had applied for and received a PPP loan.”
• If read literally, this means that a buyer, irrespective of its own size, thatbuys a PPP-eligible business with less than 500 employees, could apply for a PPP loan using the target’s pre-closing headcount size and payroll information. FAQ 38 doesn’t expressly say that you would ignore the affiliation rules there, but unless the FAQ is meant to apply only where the buyer had virtually no operations of its own (and that might actually be the intent here), it’s not clear what else that asset-sale provision could mean.

At this point, we should pause and note the incredible timing here.  The SBA has for the first time addressed how an M&A transaction affects a PPP applicant … on the very same day that leading Democrats proposed a bill that would ban most M&A transactions for the duration of the pandemic.  You can’t make this stuff up.  We will continue to monitor that bill, but barring a shift in the political winds, I remain hopeful that it has little chance of passing and is merely “an exercise in political symbolism … the equivalent of a Trump tweet.”

FAQ #39 pretty much reiterates the language from yesterday’s press release about reviewing loans in excess of $2M, which itself pretty much reiterated Mnuchin’s CNBC comments:

“SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. Additional guidance implementing this procedure will be forthcoming.”

To be fair, FAQ #39 does go on to say again, and stop me (oh, oh, oh stop me, stop me) if you think that you’ve heard this one before, that the lenders are absolved from responsibility here because the SBA review will not impact its guarantee of the loan so long as the lender complied with its obligations in IFR 1 to:

(i)           Confirm receipt of borrower certifications contained in PPP application form;

(ii)           Confirm receipt of information demonstrating that a borrower had employees for whom the borrower paid salaries and payroll taxes on or around February 15, 2020; (NOTE: IFR 3 modified this requirement for self-employed individuals and sole proprietorships with no employees and IFR 5 further modified this requirement for seasonal employers.)

(iii) Confirm the dollar amount of average monthly payroll costs for the preceding calendar year by reviewing the payroll documentation submitted with the borrower’s application. (NOTE: FAQ #14 modified this by allowing borrowers to use payroll costs from either 2019 or the TTM period.)

I doubt that SBA means for FAQ #39 to supersede IFRs 3 and 5 and FAQ #14 (which superseded IFR 1 and FAQ #1), but FAQ #39 is at best inconsistent with the intervening rules and FAQ.  It seems unlikely that SBA’s guarantee of a loan could be put at risk merely because the bank relied on the middle guidance.   Facing SBA actions like that and the ever shifting sands of the SBA guidance, banks may be worried that SBA is starting to remind them of Otter’s comment to Flounder when they brought his car back.

We also got an update on the Main Street program today from Fed Chairman Powell at his press conference.

• The Fed has considered more than 2,000 public comments received relating to the MSNLF and MSELF programs and we should expect revised term sheets “soon.” This follows a report yesterdaythat the Fed has been soliciting input from banks on the program and that term sheets would be released “in the next few weeks.”
• It sounds like the Fed is trying to balance the twin goals of (a) addressing immediately prohibitive facility terms raised by the public comments and (b) bringing each facility to market as soon as possible to augment liquidity for middle-market businesses.
• Accordingly, the Fed has indicated that it will deliver a series of iterations of the revised term sheets aimed at “expanding” the scope of eligible participants, perhaps on both the borrower and non-bank lender sides, over the next couple of months as it continues to monitor real-time market conditions.

Iterative term sheets?!  Again?  Until recently, I would have said that I have far more confidence in the Fed’s rulemaking capabilities, but after wrestling with their 30% total equity limit for the past few months … this could be PPP 3.0:  Nightmare on Main Street. 

I did not see an update on loan volume today, so that’s all for tonight.