It is Friday, May 8th, twelve days after the deadline imposed under Section 1106(k) of the CARES Act for SBA to “issue guidance and regulations implementing” PPP forgiveness. There are now more than 4.1 million PPP borrowers awaiting such guidance and regulations.
I’ve been holding off sending off an update in the hopes of providing something substantive, but SBA and Treasury issued NO guidance since a minor FAQ on Wednesday. FAQ #45 clarifies that a PPP borrower who returns its loan during the safe harbor period will be deemed not to have ever received such loan, which means that such borrower is eligible to utilize the employee retention tax credit, which would not otherwise be available to PPP borrowers.
In the continued absence of such guidance, here’s a Friday afternoon, week-ending update on a variety of other PPP and stimulus related topics.
IRS yesterday eased the requirements for claiming such credits, allowing employers who are only providing health insurance benefits to furloughed employees to claim the credit. Earlier this week, IRS also released guidance allowing REITS and BDCs taxed as RICs to reduce the required cash component of their dividends from 20% down to 10% through the end of the year. IRS allowed similar flexibility in 2008, in both instances seeking to ease the cashflow burdens on BDCs who are facing reduced cashflow from distressed borrowers.
As the pandemic drags on with reopening dates uncertain for many businesses, there arelobbying efforts are underway to extend these 8-week forgiveness period to allow businesses to have more time to bring back workers and to keep them on payroll. Today’s jobs report showed the loss of 22 million jobs in April alone. It is sobering to consider what that number might look like when the PPP funds run out. President Trump has claimed that 30 million jobs have been saved by PPP. If businesses are unable to open or otherwise restart their revenue streams before these PPP forgiveness periods expire, those jobless numbers could skyrocket. It is seeming increasingly likely that some form of jobs stimulus, whether PPP 3.0 or otherwise, will be included in the next stimulus package.
Yesterday was an interesting inflection point on these forgiveness periods because it was the first day on which the 8-week forgiveness periodends after the “covered period” of Feb 15 – June 30, 2020. (The 8-week period starting Thursday May 7 ends Wednesday July 1.)
· Borrowers seeking full forgiveness of their loans must restore any FTE headcount reductions, and applicable individual compensation reductions during their covered period, which eliminates some optionality for borrowers. (See a detailed explanation below).
· Those who have argued that borrowers “must use” all of their PPP loan proceeds prior to June 30 will need to reconcile that interpretation with the reality of the 8-week forgiveness period for current and future borrowers. That argument seems to stem from Section 1102(f) of the CARES Act which provides that “During the covered period an eligible recipient may, in addition to the allowable uses of a loan made under this subsection, use the proceeds” for the specified purposes. The argument, as I understand it, goes that because Congress only said that you may use them during the covered period (which in Section 1102 is Feb 15- June 30), you may NOT use them thereafter. I believe that such an interpretation is unduly restrictive and contrary to the intention of the CARES Act, and impossible to square with forgiveness periods that extend beyond June 30. (A quick reminder that nothing in these emails is legal advice.)
Many borrowers will face this situation as money is flowing much more slowly in PPP 2.0. After SBA approve $349B in 13 days under PPP 1.0($26B per day) and $175B in the first five days of PPP 2.0 ($35B per day), the flow this week has dropped to less than $2.5B per day. This is a function of a much smaller loan size this week ($34k) and a drop in the number of loans approved per day from 400-500k per day, down to ~71k per day. (Note that even at this reduced volume, SBA is still processing more loans per day than it did in all of 2019.)
That also means that we have a winner in the pool. Congratulations to John Gardner, a partner in our Restructuring & Insolvency group who is the sole surviving entry with his guess of May 13th. All of the other entries we for May 7thor earlier. John, since you’re a partner, you probably shouldn’t have been eligible, but fair is far, and your airplane bottle of bourbon is on the way.
While PPP funding has slowed down, PPP litigation continues unabated.
· At least lawsuit has been filed against SBA and Treasury arguing that the FAQ 31 guidance relating to “access to other sources of liquidity” is improper under the CARES Actand is essentially a reapplication of the no-credit elsewhere requirement that was expressly waived by the CARES Act.
· SBA is also subject to a putative class action lawsuit alleging discrimination against minority- and women-owned businesses.
· Nearly a dozen bankrupt borrowers have brought cases against SBA and Treasury inbankruptcy court, seeking to be made eligible recipients, with mixed results across various jurisdictions.
· You may also recall that we were surprised when IFR 1 barred from PPP eligibility those borrowers who had traditionally been ineligible for SBA 7(a) loans. Many such borrowers have brought suit against SBA and Treasury challenging such distinctions on both constitutional and administrative law grounds arguing that their exclusion is improper, including:
o Lobbyists (excluded under 110(r)), who lost in the DC District court and have filed an appeal; and
o Strip clubs (excluded under 110(p) as businesses presenting live performance of a prurient nature) who have won a TRO ruling in Wisconsin and thus may not be left (ahem) uncovered by the PPP.
For what it’s worth, our initial interpretation of the CARES Act was that most ineligible businesses were made eligible under the plain reading of the statute itself, where Section 1102 expressly provides for “increased eligibility” for borrowers, providing that “in addition to small business concerns, any business concern,” with fewer than 500 employees is eligible. We were surprised when SBA imposed those preexisting restrictions under IFR 1.
In my personal opinion in , SBA’s approach seemed at the time, and in many instances still seems, contrary to the intent of Congress in making the CARES Act broadly available to businesses to keep workers employed. At the very least, it seems SBA will have a challenge explaining why these exclusions should remain in place when many other categories of traditionally ineligible businesses have been made eligible for PPP loans by the CARES Act itself (501(c)(3) nonprofits, veterans organizations and tribal businesses) or recent SBA interpretations, such as:
· gambling businesses,
· government-owned hospitals, and
· businesses which have equity investments from a lender’s Associate.
Finally, CNBC has noted the challenges facing many borrowers and perhaps took a subtle dig at SBA. While it doesn’t quite match the Twitter spat between Secretary Mnuchin and Axl Rose, CNBC’s choice of picture sure seems to be literally facing off with a picture recently used by SBA on its PPP site:
Have a good weekend and Happy Mother’s Day to all the moms reading this!