SBA PPP and FRB Main Street Program – Good Friday Update

I hope everyone had a nice evening, whether celebrating the end of Lent or a Passover seder  or simply taking a break from working (from home).   The update from our policy team on today’s developments is below and here are a few other items of note:

  • Independent contractors and sole proprietors may begin applying for PPP loans today (Friday). 
    • The American Banker reported that out of 25 million small businesses in the US, nearly 20 million have no employees.  Thus, the ranks of independent contractors and sole proprietors could potentially quadruple the number of PP applicants, putting more strain on a system that already seems well beyond capacity, despite Herculean efforts by the banks and SBA.  This is not likely to go smoothly and may increase pressure on both parties in congress to find a compromise solution to upsize the program, to ease the fears of so many people who are worried the money will run out in a few days.   
    • Vice President Pence had mentioned that we might see updated guidance on independent contractors on Thursday, but it does not appear to have been posted. We will be on the lookout for it tomorrow as well as the promised guidance on forgiveness and will update you if/when we see it.
  • As you know, the Fed announced several new liquidity facilities, including two “main street” facilities, the Main Street NEW Loan Facility (MSNLF) and the Main Street EXPANDED Loan Facility (MSELF). I have attached a redline comparing the two pdf term sheets released by the Fed yesterday, as well as our summary term sheet, which we hope is in a user-friendly format for those accustomed to middle market financing term sheets.
    • The main difference between the programs is that the MSNLF is for new loans of up to the lesser of $25m or a total of 4X 2019 EBITDA to borrowers who do not already have loans from the lender bank, while MSELF is intended to allow borrowers to upsize existing credit facilities by up to $150m, 30% of the borrower’s aggregate bank debt or a total of 6X 2019 EBITDA.   
    • We await further guidance and details from the Fed, including whether borrowers, especially under MSNLF, can use the EBITDA measure from their existing credit facility to calculate the 6X limit (aka the Fed’s “red line”).  Most debt covenants are currently based on “adjusted” EBITDA, so the Fed may be reluctant to allow that — especially because the starting point is already 2019 EBITDA, which is almost surely higher than TTM Q1 2020 EBITDA for most borrowers, and in many cases significantly higher.  Stay tuned.
    • The CARES Act imposed limits on executive comp, stock buybacks and dividends for the Fed direct-lending and “mid-sized” facilities, but not require that such limits apply to the Main Street facility.  Many had hoped that the Fed would use the Main Street facility precisely to avoid those limits, but instead, the Fed has incorporated them to both MSNLF and MSELF.  We likely will need further guidance from the Fed as to whether and, if so how, these limits apply to pass-through and other non-corporate entities and their owners.
    • Both MSNLF and MSELF are available only to support loans made by banks and S&Ls (and their holding companies). This leaves private non-bank lenders out in the cold somewhat, but they also will not be constrained by the red-line or 4X leverage limit, and are not required to impose the exec comp and equity limits. Thus, they likely will remain attractive borrowing options for many middle market companies and PE sponsors, especially if BDCs, private credit funds and other non-bank lenders are able to take advantage of the additional Fed liquidity facilities for their own balance sheets and liquidity.  (Keeping in mind the SEC relief noted below providing borrowing flexibility for BDCS).
  • We are aware that many sponsors and SBICs are working to close transactions to finance a portfolio company in part to help it obtain an exemption from the PPP affiliation rules.   From what we are seeing and hearing, it seems that all parties are working in good faith to structure legitimate arm’s-length transactions designed to help the small business and its employees while following this helpful guidance from our friends at SBIA. 

That’s it for tonight.  This is a long weekend for many, and I hope all of you are able to enjoy a break and some time with your families and loved ones, whether in person or virtually.  Stay safe (and sane).

Congressional Response

Phase 3.5: Interim Coronavirus Relief Measure

This morning the Senate failed to pass an interim coronavirus relief measure aimed at increasing the funding available for the Small Business Administration’s Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (H.R. 748). Senate Majority Leader Mitch McConnell (R-KY) tried to pass the Senate Republicans’ proposal, a clean increase in funding available for the Paycheck Protection Program of $251 billion, through unanimous consent.

Senator Chris Van Hollen (D-MD), however, objected to the unanimous consent request and presented Democrats’ own proposal. According to the attached summary released today, the proposal would provide $250 billion for small businesses, $100 billion for health care providers, $150 billion for state and local governments to fight the pandemic, and a SNAP benefit increase. Leader McConnell blocked Democrats’ proposal and the chamber adjourned without reaching a compromise on the interim relief measure.

At this point it is unclear whether the Senate may take the bill up again during its next pro forma session, which is scheduled for Monday. In the meantime, congressional leaders are likely to continue negotiations. Even if a deal is reached in the Senate, its prospects in the House are unclear. House Speaker Nancy Pelosi (D-CA) warned that the Senate proposal was unlikely to pass by unanimous consent in the House.

It is important to note that neither party has expressed fundamental disagreements with each other’s proposals. Their disagreement has focused on timing, with Republicans supporting addressing Democrats’ policy priorities as part of a potential fourth coronavirus relief package (Phase IV). Democrats, however, have an increased sense of urgency to act on several of their priorities as Republicans express their preference for waiting until Phase III is implemented before they proceed to Phase IV.

Meanwhile, stakeholders continue to advocate for relief as part of the next relief package. America’s Health Insurance Plans and the Blue Cross Blue Shield Association are advocating for market stabilization measures, as outlined this week. They reported that health insurers’ costs for testing and treating could reach $556 billion in 2020 and 2021. Postmaster General Megan J. Brennan also warned policymakers during a briefing that the Postal Service will “run out of cash this fiscal year” without help from Congress.

Congressional Oversight

Senate Health, Education, Labor, and Pensions Committee Chairman Lamar Alexander (R-TN) and Senator Roy Blunt (R-MO) sent a letter to Department of Health and Human Services Secretary Alex Azar asking him to clarify that the coverage of testing requirements recently enacted apply to both the diagnosis of COVID-19 or SARS-CoV-2 as well as the detection of antibodies to SARS–CoV–2.

A bipartisan group of Members of Congress sent a letter to the Federal Emergency Management Agency expressing concerns about the allotment of emergency medical supplies to the Washington, D.C. region, citing recent remarks by Dr. Deborah Birx, White House Coronavirus Response Coordinator, that D.C. is on track to become one of the next coronavirus hotspots.

In that regard, House Energy and Commerce Committee Chairman Frank Pallone (D-NJ) and House Armed Services Committee Chairman Adam Smith (D-WA) sent a letter to President Trump requesting a clear and coordinated strategy to produce and acquire necessary medical supplies. The letter comes as the House Oversight and Reform Committee released a report on “the insufficient distribution of personal protective equipment and critical medical supplies to states.”

Agency Response

Federal Reserve

Today the Federal Reserve announced several actions to provide up to $2.3 trillion in loans to support the economy. This includes bolstering the effectiveness of the Paycheck Protection Program through the Paycheck Protection Program Liquidity Facility; ensuring credit flows to small and mid-sized businesses with the purchase of up to $600 billion in loans through the Main Street Lending Program; and helping state and local governments by establishing a Municipal Liquidity Facility that will offer up to $500 billion in lending to states and municipalities.

Treasury and Internal Revenue Service

Treasury and the Internal Revenue Service issued Notice 2020-23 extending the filing, payment, and administrative deadlines to provide relief to taxpayers affected by COVID-19. This includes postponement of due dates with respect to certain tax returns and federal tax payments; relief with respect to specified time-sensitive actions, including time for filing certain petitions to Tax Court; and administrative deadlines.

Department of Labor

The Department of Labor (DOL) announced today that, in the week ending on April 4, unemployment claims reached 6.6 million. DOL issued corrections to the temporary rule issued on paid leave under the Families First Coronavirus Response Act. The Occupational Safety and Health Administration expanded temporary guidance regarding supply shortages of N95s or other filtering facepiece respirators due to the pandemic.

Health and Human Services

The Centers for Disease Control and Prevention (CDC) issued interim guidance on safety practices for critical infrastructure workers who may have been exposed to COVID-19. CDC advises that “critical infrastructure workers may be permitted to continue work following potential exposure to COVID-19, provided they remain asymptomatic and additional precautions are implemented to protect them and the community.”

In addition, the Centers for Medicare and Medicaid Services announced workforce flexibilities aimed at reducing supervision and certification requirements so that practitioners can perform work to the full extent of their licenses in certain settings, including rural hospitals, skilled nursing facilities, and others.

Finally, the Office of Civil Rights announced that it will exercise its enforcement discretion and will not impose penalties for violations of the HIPAA Rules against covered entities or business associates in connection with good faith participation in COVID-19 community-based testing sites.

White House Guidelines

We understand the White House is considering creating a task force that would focus on efforts to reopen the U.S. economy. Dr. Birx and Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, have been in discussions regarding the medical criteria for the guidance. Dr. Fauci indicated yesterday that the number of COVID-19 cases in the country could plateau in the next week.

Please do not hesitate to let us know if you have any questions. The K&L Gates COVID-19 resource center, which includes a variety of updates from across the firm’s platform, can be found here. Thank you.

Best,

K&L Team

Initial Read on New Fed Main Street Liquidity Facilities: MSNLF, MSELF

Sometimes life comes at you fast.  Apologies for the second post today, but I’ve received enough questions that I thought it made sense to bother you again:

  •  The Senate met and failed to upsize PPP.  Democrats wanted to add an additional $250B for hospitals and local governments.  Stay tuned.
  • The Fed announced $2.3 trillion of new liquidity and provided term sheets for the new PPP Lending facility that will lend against PPP at par, expanded PMCFF, SMCFF and TALF programs and created a municipal liquidity facility (MLF) to lend to state and local governments.
  • Combined size will be up to $600B.
    • Fed SPV to purchase 95% participations in eligible loans.
    • Originating lenders (limited to banks and S&Ls) would retain 5%.
    • Eligible Borrowers are businesses with up to 10k employees or $2.5B in 2019 revenues.
    • Terms:
      • 4 year maturity;
      • Amortization of principal and interest deferred for one year;
      • Adjustable rate of SOFR + 250-400 basis points;
      • Minimum loan size of $1 million;
      • Maximum loan size that is the lesser of (i) $25 million or (ii) up to 4x 2019 EBITDA leverage, taking into account existing drawn and committed debt facilities (QUICK READ:  This could greatly limit availability to PE sponsored companies);
      • Prepayable without penalty.
  • Loans cannot be used to refi existing debt (which makes the 4x leverage especially challenging).
  • Borrower attest that it:
    • It requires financing due to the exigent circumstances presented by the COVID-19 pandemic, and
    • using the proceeds of the Eligible Loan, it will make reasonable efforts to maintain its payroll and retain its employees during the term of the Eligible Loan.
  • The Fed is imposing the comp, dividend and buyback limits from the CARES Act.  (Will follow up with more detail on that.  There had been hope that these would NOT apply to main street.)
  • Yesterday, the SEC announced yesterday that it will allow increased flexibility for BDCs to raise capital (but is not waiving dividend requirements as some had hoped).