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A look at how portfolio companies have struggled with the PPP

May 21, 2020

By now, funds, private equity firms and portfolio companies are well aware of the SBA Paycheck Protection Program (PPP), enacted in late March as part of the $2 trillion-dollar stimulus package, better known as the Coronavirus Aid, Relief, and Economy Security Act (CARES).

The latest SBA guidance issued last week as FAQ #46 offers what appears to be the most sensible SBA details yet – a “safe harbor” regarding good faith certifications and related economic needs.

FAQ #46 states that any borrower that, together with its affiliates, receives PPP loans of less than $2 million is deemed to have met the economic uncertainty test and would presumably not face an audit.

Before we address that safe harbor, it’s helpful to understand some background. 

For weeks, funds, private equity firms, and portfolio companies evaluated the qualifications and applied for loans, only to be halted in late April by the fourth PPP Interim Final Rule. Pursuant to that guidance, SBA indicated that hedge funds and private equity firms are ineligible to receive a PPP loan because these entities are primarily for investment or speculation.

However, in that same guidance, SBA indicated that a portfolio company of a fund or private equity firm may still be eligible for a PPP loan, provided the borrower (the portfolio company) appropriately considers the SBA affiliation rules, as set forth in the Second PPP Interim Final Rule, and is able to certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.”

In addition to these Interim Final Rules, the SBA has been issuing FAQs related to the PPP. One FAQ (FAQ #31) explained that all borrowers must assess their economic need for a PPP loan at the time of the loan application. This includes considering current business activity and the ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business.

Suddenly, there was concern among funds and private equity firms regarding how to interpret this guidance for those portfolio companies obtaining loans. With no definitions of “adequate sources of liquidity” and “not significantly detrimental,” paraphrasing FAQ #37, and its circular reference to the FAQ #31 response, the question looked like this:

Do [portfolio companies] owned by [funds or private equity firms] with adequate sources of liquidity to support the [portfolio companies’] ongoing operations qualify for a PPP loan?

Frankly, funds and private equity firms were perplexed trying to understand the SBA’s responses to FAQs #31 and #37.

Now FAQ #46 and its “safe harbor” provides some welcome clarification, whereby --

Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.

Effectively, FAQ #46 provides more confidence to a portfolio company, or group of affiliated portfolio companies, with PPP loans of less than $2 million that the SBA has blessed their good faith certification, bringing relief to the perplexing liquidity question.

However, those with $2 million or more in PPP loans, unfortunately do not fall within the safe harbor. 

Given the SBA intends to review all loans in excess of $2 million, those portfolio companies, along with affiliates, that have loans in excess of $2 million should be ready.  Our best advice would be for these portfolio companies to consult with their attorneys to properly document the effects of the current economic uncertainty at the time of the PPP loan application, and the reasons why that economic uncertainty contributed to any inability to adequately access liquidity.

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Samantha A. Wimmer, CPA
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