On April 24, 2020, President Trump signed the Paycheck Protection Program and Health Care Enhancement Act.
The Act provides:
- $310 billion in additional Small Business Administration (SBA) loan guarantee authority under the Paycheck Protection Program (PPP);
- $100 billion in additional funding for the Department of Health and Human Services, composed of $75 billion to reimburse health care providers for care and lost revenue attributable to COVID-19 and $25 billion to develop COVID-19 and to monitor and suppress COVID-19;
- $50 billion to the Economic Injury Disaster Loan (EIDL) program; and
- $10 billion for Emergency EIDL grants.
The Act also sets aside $60 billion of the new PPP funds for loans by smaller lenders and extends eligibility for EIDLs to some agricultural enterprises.
The SBA began processing new PPP loans on April 27, 2020.
Also at the end of last week, in response to perceived unfairness that some large, public companies received PPP loans while many smaller applicants did not, the SBA modified its guidance (see Question #31) to reiterate that PPP loan applicants must certify in good faith that PPP loans are necessary to support the applicant’s ongoing operations. It did not change the standard for applying for a loan, but it did suggest that to establish a good-faith belief, applicants must take into account “their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.” The SBA stated that it will not take action against an applicant for taking a loan without believing in good faith it was necessary, if the applicant repays the loan by May 7, 2020. On April 28, Treasury Secretary Mnuchin announced at a press conference that PPP loans over $2 million will be audited, and emphasized that “it’s the borrowers who have criminal liability if they made this certification and it’s not true.”
New applicants—and borrowers who have already received PPP loans—should assess or reassess the good-faith determination that a PPP loan is necessary. We believe the assessment should be done at the board level, and that boards should discuss and consider:
- Alternate sources of liquidity, including cash-on-hand, availability under existing bank lines (or access to new bank lines), equity and debt transactions, and the cost (financial and other) and terms of any available financing, the timing and certainty of closing, the effect of the financing on the borrower’s stock price and dilution of existing shareholders, and uncertainties associated with alternate financings considering market volatility and the general economy. The SBA acknowledges that the CARES Act suspends the ordinary SBA requirement that borrowers must be unable to obtain credit elsewhere, although this renewed focus on “necessary” puts into question placing too much reliance on the effect of that waiver. Although the phrase “not significantly detrimental to the business” is not defined, it appears to invite a reasoned assessment of the mid- and long-term effects of alternative financings, including their effect on potentially required future financings when PPP loans are no longer available.
- How COVID-19 and related governmental actions (including stay-at-home orders) have affected the borrower’s current operations, and the short- and medium-term effect of forgoing a PPP loan on employees and on the borrower’s business.
Good board minutes will recite in sufficient detail the considerations that allowed the board to affirmatively derive its good-faith belief that:
The current economic uncertainty related to the COVID-19 pandemic makes a Paycheck Protection Plan loan [request] necessary to support the Company’s ongoing operations, taking into account its current business activity and its ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to its business.
Not directly related to the SBA guidance, but still important for the board to consider are:
- The possibility that all or a portion of the loan will not be forgiven, particularly considering the uncertain application of loan forgiveness provisions in the CARES Act and the current dearth of SBA guidance.
- The risk of negative publicity, particularly since the Federal Reserve announced it intends to publish the names and details of PPP loan recipients.
- If the PPP loan is for more than $2 million, Treasury Secretary Mnuchin’s statement that the loan will be audited, and the lack of guidance on audit standards.
In its updated guidance, the SBA singled out large public companies, stating its view that “it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.” On April 28, the SBA further updated its guidance—see Question #37—to state that private companies with adequate sources of liquidity also may be precluded from making the required certification.
We expect that some high-profile borrowers that have returned PPP loans—for example, Ruth’s Chris and Shake Shack—did so because of negative publicity combined with the likelihood that only a small portion of the PPP loan would be forgiven. (These companies may have been unable to hire back a sufficient number of productive employees while stay-at-home and other restrictions on their businesses are in place, which would convert the PPP into an inexpensive, short-term loan, which is not as attractive as a federal grant.) Although very few public companies or large private companies qualify for PPP loans, except for those specifically exempted from SBA affiliation rules like restaurants and hotels, we expect that many, in particular those with small market capitalizations, will keep or apply for PPP loans. We also expect that the additional $310 billion authorized for the PPP will not be sufficient to meet demand for PPP loans, and that additional stories of “undeserving” loan recipients will continue to pressure the SBA and Treasury Department.
The SBA continues to update its rules and guidance:
- On April 26, it confirmed that for purposes of determining eligibility under the 500-employee threshold, all employees (and not just full-time-equivalent employees) count. (See Question #36.)
- On April 27, it adopted an interim final rule to establish alternative criteria to calculate the maximum loan amount for seasonal employers.
- On April 28, it adopted an interim final rule to clarify that a borrower must take the full loan disbursement in a lump sum within 10 days of SBA loan approval, and may not take multiple draws to delay the start of the 8-week covered period. Lenders must send the SBA a form 1502 indicating that the loan has been disbursed within 20 days of SBA loan approval, and won’t be paid its fee unless and until loans are actually disbursed. Lenders will not receive a fee for loans that are repaid by May 7.
For guidance about the challenging issues facing employers during this pandemic, see our COVID-19 Resource Hub and reach out to your Stoel Rives attorney.