Evolving PPP Loan Terms Impacting Acquisition and Financing Activity
Many well-intentioned programs have unintended consequences. The Paycheck Protection Program (PPP) loans under the CARES Act appear to be no exception.
While PPP loans were a lifesaver for numerous businesses and potentially the economy in general, they may have contributed to a general slow-down in merger and acquisition (M&A) deals during August and September.
The Issue
A series of terms in the SBA’s standard loan documents and servicing guidelines required both the lender, and the SBA itself, to consent to any change in equity ownership or similar change of control/ownership events for PPP borrowers.
Without that prior consent, which the SBA indicated it wouldn’t be able to provide, closing any such transaction could trigger an immediate event of default and negate any potential forgiveness of the PPP loans.
Therefore, many sellers have been waiting for their loan to be forgiven before they close a deal. However, they had to deal with several realities:
Potential Progress
A recent Wall Street Journal article noted that Government officials announced intentions to approve and fund forgiveness requests as soon as the first week of October. Further, in early October, the SBA issued a Procedural Notice providing clarity to companies raising equity capital or selling their business. The key take-aways:
Deal Outlook
We expect the combination of these developments – faster forgiveness approval and work-arounds to closing deals in the meantime - could alleviate the final closing conditions for many pending deals. Clarity and certainty tend to help market momentum.
While PPP loans were a lifesaver for numerous businesses and potentially the economy in general, they may have contributed to a general slow-down in merger and acquisition (M&A) deals during August and September.
The Issue
A series of terms in the SBA’s standard loan documents and servicing guidelines required both the lender, and the SBA itself, to consent to any change in equity ownership or similar change of control/ownership events for PPP borrowers.
Without that prior consent, which the SBA indicated it wouldn’t be able to provide, closing any such transaction could trigger an immediate event of default and negate any potential forgiveness of the PPP loans.
Therefore, many sellers have been waiting for their loan to be forgiven before they close a deal. However, they had to deal with several realities:
- The SBA portal only recently opened up for banks to submit forgiveness applications;
- Many banks were not yet accepting the applications (in order to turn them into the SBA) because of a lack of guidance on several issues, as well as hope that a streamlined forgiveness process would be approved through further legislation;
- Apparently, none of the approximately 96,000 forgiveness applications that had been submitted have been approved thus far; and
- The general guidance was that the banks had up to 60 days from receipt of the application to submit to the SBA and then the SBA had another 90 days to respond to the application (which response could be that they need more time or information). The expectation set by many banks was that the SBA would likely take the entire time.
Potential Progress
A recent Wall Street Journal article noted that Government officials announced intentions to approve and fund forgiveness requests as soon as the first week of October. Further, in early October, the SBA issued a Procedural Notice providing clarity to companies raising equity capital or selling their business. The key take-aways:
- Raising Capital / Non-Controlling Stakes – the sale of 50% of less of the borrower’s equity (or assets) is generally allowed;
- Complete Sale / Controlling Stakes – the sale of all or the majority of a borrower’s equity generally requires (a) that the forgiveness application be submitted and (b) an escrow account is established to hold cash equal to the loan balance until the application is approved; and
- Asset Sales – a sale of more than 50% of a company’s assets is generally treated the same as a sale of the majority of their equity for these purposes.
Deal Outlook
We expect the combination of these developments – faster forgiveness approval and work-arounds to closing deals in the meantime - could alleviate the final closing conditions for many pending deals. Clarity and certainty tend to help market momentum.
