In response to the recent publicity surrounding certain large, publicly-held restaurant chains receiving Paycheck Protection Program (“PPP”) loan proceeds, the SBA issued guidance on the eligibility of businesses owned by large companies, specifically questioning whether they can truly certify in good faith that the PPP loan request was necessary. The resulting SBA guidance has been vague and created more questions and uncertainty for businesses who have received PPP loan proceeds and otherwise meet the eligibility requirements. Many businesses are now considering whether they can stand behind their original certification as to the necessity of the loan proceeds, and if unsure, are considering the return of the PPP funds by the Safe Harbor deadline – this coming Thursday, May 14, 2020.
The guidance at issue is Question 31 of the Frequently Asked Questions issued by the U.S. Treasury:
Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?
Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking 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. For example, 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. Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by [May 14, 2020] will be deemed by SBA to have made the required certification in good faith.
What now? Given how broad, and in many ways vague, the above guidance is, there is no simple application for any business. Each borrower should therefore consider the following non-exhaustive list of factors in assessing its current and near-term operations and finances in light of the economic hardships caused by Covid-19 and the government’s response to the pandemic, and thereafter decide whether it can stand behind the certification made in its PPP loan application.
Some factors to consider are:
- Has the company had to close temporarily due to governmental regulations requiring closure or COVID-19 infections on-site? How has this closure impacted revenue?
- What is the re-opening plan and timeline if the business was forced to close? Do you expect demand to be down even after it re-opens?
- Has there been a reduction in customer orders? How likely is it that significant customers may reduce orders in the near future?
- Are customers asking to push out their accounts receivable or otherwise not paying in a timely manner?
- Has the company conducted layoffs or furloughs or initiated salary reductions?
- Has the company suffered a loss in productivity due to employees working remotely or balancing childcare and work responsibilities?
- Is the company taking other steps to reduce costs, such as delayed capital expenditures, preserving cash or instituting a hiring freeze?
- Has the company prepared financial projections for at least the next few months? What do those look like?
- Are there any concerns with disruptions or delays in the company’s supply chain? Have material suppliers delayed or declined to accept orders?
- Does the company have reasonable access to liquidity from banks, equity owners or third parties? If so, what are the pricing and other terms and how would such a drawdown or transaction impact the business? How does the leverage align with the businesses’ past performance (e.g., is the company traditionally debt adverse or highly leveraged)?
- How likely is an event of default to occur under existing credit facilities or other agreements? For example, are the financial ratios too close for comfort?
- Are there reasons that the company may want to avoid any level of governmental scrutiny? (Businesses that borrowed $2 million or more in PPP funds will be subject to an SBA audit.)
In addition to conducting an assessment of its current and near-term operations and finances, it is imperative that businesses carefully document the financial information, projections and other information that is applicable to and was considered in making its certification that the loan was necessary to support ongoing operations.
Please do let us know if we can assist you as you consider your business’ standing in light of this latest guidance, and as other questions continue to arise in respect of the Paycheck Protection Program. The following CowanPerry attorneys are happy to assist you:
James K. Cowan, Jr. at email@example.com / 540.443.2860
Suzanne Y. Pierce at firstname.lastname@example.org / 540.400.8127
CowanPerry PC is here to assist you in navigating these unprecedented times.