Ok campers, rise and shine and … what’s that? You’re longing for a Groundhog Day update on where we are in the seemingly endless loop of PPP questions? Well, I got you, babe. Sit down, grab an entire carafe of coffee and let’s get after it.
1. As politicians in DC debate new stimulus measures and economists debate whether the PPP program was actually helpful, SBA released yesterday updated loan data:
2021 First Draw Loans
$ 4.8 B
Second Draw Loans
2. Behind that data though, PPP lenders and SBA are struggling to simultaneously process both new loan apps and forgiveness apps at the same time.
a. Many lenders have only one portal or the other open. Most are leaning toward having the portal open for new loans because:
i. Idealist view: Their customers/borrowers need access to the PPP capital before it runs out in order to keep people employed.
ii. Cynical view: Banks get fees for new loans and not for forgiveness.
iii. Goldilocks (realist) view: Some of the FinTech and other service providers who enabled the huge volume of loan applications are not providing support for the forgiveness portal. Banks are doing what they can and applications are much easier because they already have systems set up to process new loan applications whereas forgiveness is much, much harder, so they are focusing on what is possible.
b. SBA has scrapped the e-Tran system for a new system that much morethoroughly vets applications on the front end.
i. The original goal of the program was to get the money out to borrowers and their employees ASAP.
ii. Now that SBA has had time to stand up a system, they are being more cautious. This means many loan application reviews are taking longer due to the front-end vetting, perhaps due to an SBA OIG report identifying 43,000 PPP loans totaling $11.7B that exceeded the maximum properly borrowable amount by ~$3.7B.
iii. This has led to sometechnical glitches and capacity issues, but SBA is proactively communicating procedures to resolve these issues.
iv. At the risk of being the guy who states the obvious (I got you, babe), both borrower and lenders should take care to ensure that their applications are accurate, both for new loans and for forgiveness. “Data mismatches” are raising red flags at SBA and causing delays in both processes.
3. New First and Second Draw PPP Loans:
a. It is becoming increasingly common for lenders to require information re loan applications above and beyond what is required in the statute, both in order to avoid the dreaded “data mismatch” and for enhanced BSA/KYC screening.
b. Even with a 25% revenue decline, second draw borrowers still must make the “necessity certification” that, at the time of the second draw funding “current economic uncertainty makes the loannecessary to support the ongoing operations of the borrower.”
c. The above delays in forgiveness approvals are significantly stalling second draw loan processing for “unresolved borrowers”, as noted in the ABA letter to SBA.
i. The second draw IFR provides that the SBA will not approve a loan to any borrower whose first draw loan is “under review by SBA.”
ii. SBA appears to be interpreting this broadly to mean any loan for which a forgiveness application has been submitted and not approved by SBA, even if SBA has not formally “flagged” the loan for review.
iii. SBA had previously been rejecting application from such borrowers, but now will flag them as pending and keep them in a queue, as contemplated by the IFR.
iv. We had heard that some banks were not allowing borrowers to apply for second draw loans prior to submitting a forgiveness application for their first draw loan, but it sounds like this has been resolved as SBA has clarified that borrowers of second draw loans of more than $150k need to apply for first draw forgiveness not later than simultaneously with applying for second draw forgiveness, even if the first draw forgiveness amount is zero. This implicitly means that they need not apply for first draw forgiveness before applying for the second draw loan in the first place.
d. Potential mismatches in employment levels for payroll-cost borrowing base periods vs. employee-count measurement periods are kicking out otherwise valid loans, with SBA imposing a $30k / employee cap on second draw loan amounts and rejecting those applications, as also noted in the ABA letter to SBA.
i. The $30K limit appears to be based on 3.5X the $100k per employee borrowing cap / 12 months.
ii. This comes as a surprise to many borrowers because the EAA and recent SBA IFRs allow borrowers to use 2019, 2020 or for entity borrowers the current TTM period to measure payroll costs for their PPP borrowing base. However, FAQ 14 remains in effect which does not require PPP borrowers to match their employee count measurement periods to that same payroll period.
iii. Thus, borrowers who have had a significant headcount reduction in 2020 may want to get the best of both worlds by using their lower 2020 headcount to fall below the 300 employee limit for second draw loans while simultaneously using theirhigher 2019 payroll amountsas borrowing base, only to have SBA reject the loan entirely because the lower headcount numbers cause the requested loan amount to exceed $30K per employee.
NOTE: SBA has issued several consolidated IFRs, but has not yet meaningfully updated its FAQs after passage of the EAA. On Friday (29 Jan), SBA added three new FAQs that clarified FinCEN and BSA requirements for second draw loans and to clarify that college-owned radio stations need not include employees of their owner college or university when determining PPP second draw availability. However, re remainder of the FAQs remain unchanged and are thus still applicable unless they have been superseded. The online FAQs now contain a header that they are “in the process of being revised” to reflect changes under the EAA.
e. Many borrowers who obtained first draw loans under early versions of SBA regulations are now finding that the “grandparenting” of their first draw eligibility does not apply to a potential second draw loan, thus finding themselves ineligible. This is most notable for borrower with foreign affiliates who relied on the initial exclusion of foreign employees, which was later reversed and then ”clarified” to uphold the reversal.
f. The same affiliation rules applicable to first draw loans apply both to the second draw employee count andthe second-draw 25% revenue decline threshold, leading to some odd results regarding both. It can be especially challenging for borrowers with affiliates to calculate their revenues for purposes of showing the decline. In some instances, confidentiality concerns are effectively keeping private equity portfolio companies from applying for second draw loans (which frankly, from SBA’s perspective, may be a feature and not a bug).
g. Borrowers and lenders alike seem to have some confusion on loan amounts:
i. No borrower can get afirst draw loan of more than $10M.
ii. No borrower can get asecond draw loan of more than $2M.
iii. Affiliated borrowers who are part of a “corporate group” (majority owned by a common parent) cannot get more than $20M in the aggregate of first AND second draw loans.
iv. Affiliated borrowers who are part of a corporate group cannot get more than $4M in second draw loans, which amount is reduced if that corporate group received more than$16M in first draw loans (i.e., 16 + 4 = $20), such that the $4M second draw cap is effectively as sublimit within the aggregate $20M cap.
h. Confusion reigns regarding calculation of revenue declines for borrowers who bought and sold other businesses during 2019 or 2020. To grossly oversimplify the apples-to-apples comparison that the regs try to create:
i. Businesses bought via a stock acquisition should be included for all of 2019 and 2020 including any pre-acquisition periods;
ii. Businesses sold via stock dispositions should be excluded for all of 2019 and 2020, including any pre-disposition period (i.e., you can’t sell a subsidiary to create a 25% revenue decline);
iii. Businesses bought or sold as a “segregable division” in an asset deal, are included for the period of ownership. (This is nuanced though).
i. The EAA was clear that the Save our Stages (SOS) Shuttered Venue Operator Grants (SVOG) are not available to borrowers who obtain a PPP loan in 2021. However, entities who even apply for a 2021 PPP loan are not eligible due to “how the PPP loan system operates.” Presumably this means that once an application is approved, the SBA systems are inadequate to determine whether such loan has actually been funded, as we had previously seen where applicants who had declined PPP loans, were nonetheless mistakenly listed in SBA disclosures as having received loan.
4. Forgiveness Process Updates
a. Forgiveness on loans under $2Mseems to be flowing relatively smoothly, *if* the borrower has fully and accurately completed the application.
b. Forgiveness on loans over $2M is lagging well beyond the 90-day stated review period. In fact, based on inquiries as recently as Friday, we have not heard of any borrowers yet receiving forgiveness on loans above $2M.
i. SBA is carefully vetting bothdirect and indirect ownership, including looking at TINs.
ii. Lenders and SBA have indicated that many of the forgiveness delays are being caused by those data mismatches, often caused by minor typographical errors (such as inconsistent loan amounts or maturity dates in the SBA system vs the forgiveness application), arithmetic errors by borrowers or missing information.
iii. SBA has said that this is being exacerbated byborrower delays in correcting those, even when asked. Our contacts at SBA have said that if a borrower doesn’t respond within 2-3 business days, the loan file goes back into the general stack and may not get picked up for a while and likely may then be handled (randomly) by a different reviewer. In the unlikely event someone again needs to state the obvious (I got you, babe),if SBA or the lender ask you a question or point out an error, respond quickly and accurately.
c. The enhanced review threshold for PPP loans above $2M *appears* *FOR NOW* to be applied by SBAseparately to first and second draw loans (e.g., a PPP borrower with a first draw loan of $1.1M and a second draw loan of $1.1M does not currently appear to be treated as a $2M borrower and thus automatically subject to enhanced review). This essentially leads to a complex wedding cake-tiered PPP classification:
i. Loans of $2M or more: Are getting the “Full Monty” review, including submission of theForm 3509 (or 3510 for nonprofits) and a detailed review by SBA. NOTE that the $2M is tested in the aggregateacross affiliated borrowers.
ii. Loans up to $2M: are presumed to have made the “necessity certification” in good faith.
iii. Second draw loans >$150k: borrowers must apply for forgiveness on their first draw loans not later than simultaneously with their application for second draw forgiveness, even if their first draw forgiveness amount is zero.
iv. Loans of >$50k to $150K: may use the simplified forgiveness application and still need to certify, but do not need to demonstrate compliance with the FTE and salary/wage maintenance requirements. Second draw borrowers of up to $150K also need not provide evidence of the 25% revenue reduction at the time of applying for the second draw loan, but must provide such evidence upon applying for forgiveness.
v. Loans of $50k or less: are not subject to reduction in forgiveness for FTE or salary/wage reductions. (NOTE: this is calculated withoutaggregating PPP loans if affiliates.)
d. Many leveraged lenders amended credit agreements to exclude PPP loans from debt for purposes of their financial covenants. However, some of those (non-PPP) lenders to PPP borrowers are surprised to learn that under GAAP the borrowers are recognizing the forgiveness amount as income (or as an elimination of the related payroll, etc. expenses), either of which could EBITDA for covenant compliance purposes. Whether this amount is actually includable in EBITDA of course requires a close read of the specific EBITDA definition in the credit docs.
5. Two quick forgiveness substance updates, based on the consolidated forgiveness and loan review IFR that came out, perhaps ironically, on January 19:
a. SBA is requiring employment levels to be restored to pre-pandemic levels in order to achieve forgiveness on 2021 first and second draw loans.
b. The safe harbors to cure FTE reductions and/or salary/hourly-wage reductions must be restored prior to the end of a 2021 PPP loan’s forgiveness period (whereas for 2020 loans, the restorations could be made any time in 2020).
The good news is that the rewritten IFRs are, with the benefit of time and public comment, much better written and that both SBA and the lenders are doing their best. Unfortunately neither SBA nor most banks (especially smaller ones) have the resources for a task this size, and it’s unfair to expect perfection at this point. At the risk of being a broken record, we have to remember that the PPP lenders and SBA have pumped nearly 6 million loans through a system that did 67 thousand loans the year before. For SBA it’s even more challenging because they also have had the pending Save our Stages (SOS) Shuttered Venue Operator Grant (SVOG) program thrown on their plate. That portal is not open yet, but is expected to open very soon. If you’re looking for information on that, well I (we) got you, babe. We’ve formed a team to cover that program and have an alert in process. Stay tuned for that shortly.
In the meantime, here’s hoping that Phil does NOT see his shadow, that the vaccines and other measures work and that this long, dark literal and figurative winter quickly comes to a end.