(Re-)assessing need and maximizing PPP Loan forgiveness May 13, 2020 - - PowerPoint PPT Presentation

(Re-)assessing need and maximizing PPP Loan forgiveness

May 13, 2020

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Agenda

1 Paycheck Protection Program update 2 (Re-)assessing need 3 Positioning for forgiveness 4 A look ahead – what’s next

Presenters

Mac Bernstein

Partner, Federal Law and Policy T: 202 799 4302 mac.bernstein@dlapiper.com

Shaked Hoter

Associate, Corporate T: 202 799 4238 shaked.hoter@dlapiper.com

Michael “Mick” Helmicki

Client Development Executive T +1 703 773 4142 michael.helmicki@us.dlapiper. com

Tami Howie

Partner, Corporate T +1 202 799 4555 tami.howie@us.dlapiper.com

Ryan Vann

Partner, Employment T +1 312 368 4410 ryan.vann@us.dlapiper.com

The information provided is not intended to constitute legal advice; instead, all information, content, and materials are for general informational purposes

• nly.

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Setting the stage

▶ The PPP was designed to benefit “small” businesses to help save jobs and protect payrolls in an unprecedented time ▶ Accordingly, PPP loans have attractive features including the absence of guarantees and the ability to seek forgiveness for all or part of the loan ▶ As a result, applicants need(ed) to certify that the loan was “necessary” in light of “current economic uncertainty” and meet other eligibility and usage criteria ▶ A second tranche of $310B in PPP funding passed into law on April 24 ▶ After a number of publicly held firms qualified for the program, Treasury said these and other companies with “adequate sources of liquidity” have until May 7 to repay the loan in full; subsequently extended to May 14 ▶ Congressional oversight provisions, including appointment of the House Select Subcommittee on the Coronavirus Crisis (with subpoena power) – sent letters May 8 demanding 5 large companies return PPP loans ▶ Uncertainty remains – it is imperative to work with advisors to work through company specific issues relating to both need and forgiveness

‘‘

We have noted the large number of companies that have appropriately reevaluated their need for PPP loans and promptly repaid loan funds in response to SBA guidance reminding all borrowers of an important certification required to obtain a PPP loan.

’’

Joint statement by Secretary Steven T. Mnuchin and Administrator Jovita Carranza on April 28, 2020

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PPP timeline: where we’ve been

April 6: Q2-Q18 Published April 8: Q19-20 Published TREASURY GUIDANCE

April 6

April 13: Q21-Q25 Published; April 14: Q26-28 Published; April 15: Q29 Published; April 16: $349B Allocated & Applications Closed April 17: Q30 Published TREASURY GUIDANCE, FUNDS RUN OUT

April 13

April 23: Q31 Published April 24: Q32-35 Published April 24: Additional $310B Allocated to PPP April 26: Q36 Published TREASURY GUIDANCE & ADDITIONAL PPP FUNDING

April 20

April 28: Q37 Published April 29: Q38-Q39 Published May 3: Q40-42 Published TREASURY GUIDANCE

April 27

May 5: Q43-Q44 Published May 6: Q45 Published May 7: Date to repay loan in full for public and other companies with “adequate sources

• f liquidity”

TREASURY GUIDANCE

May 4

May 14: New date to repay loan in full for public and

• ther companies

with “adequate sources of liquidity” TREASURY GUIDANCE

May 11

March 27: Foundation for the Paycheck Protection Program set CARES ACT ENACTED

March 23

April 3: Q1 Published TREASURY GUIDANCE

March 30 Week of:

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Blueprint for the days ahead

(Re-)assess need Position for forgiveness Explore alternative programs

Consider (re-)convening the board or management to reconfirm/reconsider “necessity” certification in light of new guidance Board or management to consider repayment (before or after May 14 and on accelerated or standard terms) vs. forgiveness Generally, loan amounts will be forgiven as long as:

• Loan proceeds are used to cover

payroll costs, and most mortgage interest, rent and utility costs over the eight week period starting for the time that the loan proceeds are disbursed; and

• Employee and compensation levels are

maintained Potentially a recertification of “necessity” For all loans over $2M, Secretary Mnuchin has indicated full review Best option based on risks & circumstances Best practice for loan use, tracking & audit Others stimulus related programs may be (more) applicable based on circumstances:

• Deferral of employer taxes
• Employee retention tax credit
• Other tax programs
• BARDA and other grant programs
• Main Street Lending Program

Alternatives to PPP that may be applicable

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Need: what does it mean?

►Additional guidance (Q31) issued on April 23, 2020, clarified that a loan’s “necessity” needs to be determined in light of the applicant’s “current business activity” and “ability to access other sources of liquidity sufficient to support…ongoing operations in a manner that is not significantly detrimental to the business” ►Q31 and subsequent IFRs also introduced that applicants that applied before the guidance would be deemed to have made the certification in good faith if funds were returned by May 14 ►Continued focus on the facts and circumstances:

• changed circumstances may matter (new company financing; improved outlook; etc.)
• use of funds/other post loan activities

►Additional scrutiny will likely be based on:

• the borrower’s records and contemporaneous notes
• consideration given to other sources of capital
• loans over $2M (and possibly other loans) for which forgiveness is ultimately sought

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Assessing and documenting need

►Companies strongly urged to consider all the facts and circumstances relating to loan necessity (including company’s current business activity and access to other sources of liquidity that won’t be significantly detrimental to its business), and to document in a board resolution (and in a memo to the file) the reasons in good faith company meets this revised “need” standard ►Information for PPP Loan Memo – memo should consider the following factors in connection with establishing/reconfirming “need” for PPP Loan eligibility:

• loss of any current customers
• report of the loss or extension of AR from customers
• anticipated reduction in future customer/sales pipeline
• any prior furloughs/RIFs/salary reductions
• future furloughs/RIFs/salary reductions prevented or

delayed by PPP Loan

• availability of debt financing (eg, confirmation of no

available offers for alternative debt financing at this time)

• availability of equity financing from existing investors

(eg, confirmation of no available offers for alternative equity/debt financing at this time)

• confirmation no new investors have offered an alternative

equity/debt financing, and acknowledgement that no new investors are likely to offer an alternative financing given the current state of the business and the economic crisis

• any other information evidencing the difficult financial

state of the company (for example, significant liabilities, delayed or prolonged product development, anticipated events of default under credit facilities, etc.)

• an assessment of cash balances as compared against the

monthly burn rate and anticipated increased liabilities (eg, under credit facilities)

• confirmation of fear that business and economy will

become worse in the future

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Post PPP Loan planning: intended uses

▶ We encourage directors and management to work with the company to underscore limited uses and, although not specifically required by the PPP, ensure that funds are segregated into a separate bank account:

• Loan proceeds can only be used for the following:
• Payroll costs (75% or greater of loan proceeds)
• Interest on mortgage obligations, incurred before February 15, 2020
• Rent, under lease agreements in force before February 15, 2020 and
• Utilities, for which service began before February 15, 2020 (NOTE: the CARES Act limits

utilities to electricity, gas, water, transportation, telephone or Internet access (CARES Act § 1106(b)(4).)

• Draw a bright line: the company to open a new bank account that segregates loan proceeds
• No co-mingling of funds
• Clean audit trail
• Severe criminal and civil penalties for improper use of funds
• Expect more clarification from the SBA on forgiveness in the coming weeks

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Post PPP Loan planning: payroll costs

▶ Payroll costs that are eligible for loan forgiveness:

• Salary, wages, commission or similar

compensation (recent SBA guidance states that payroll costs include all cash compensation, including a housing stipend

• r allowance)
• Payments for vacation, parental, family,

medical or sick leave

• Allowance for dismissal or separation
• Payments for the provision of group health

care benefits, including insurance premiums

• Payments for retirement benefits
• State or local payroll taxes (SUTA)

▶ Payroll costs specifically not eligible for loan forgiveness:

• Payments to an independent contractor
• Cash compensation in excess of $100,000
• The employer’s share of federal payroll

taxes

• Qualified sick leave and qualified parental

leave wages for which credit is allowed under the Families First Coronavirus Response Act (FFCRA)

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Post PPP Loan planning: usage

Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 Week 8 Payroll Health benefits Rent Utilities

End Forgivable Period Loan Disbursed Participants are eligible for loan forgiveness for the amounts spent on authorized expenses over the eight weeks after receiving the loan 75%+ of loan use <25% of loan use

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• 75% of the funds must be spent on payroll
• A reduction to the loan forgiveness will be made if the average number of full-time employee equivalents

(FTEs) per month during the eight-week period is less than the average number of employees per month during the look-back period

• No reduction on a salary more than 25% per employee for those making under $100K, for those over $100K,

salaries can be reduced to $100k

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Post PPP Loan planning: example

Annual salary Weekly Annual cap Weekly cap 8-week cap Bob Edwards $ 250,000 $ 4,808 $ 100,000 $ 1,923 $ 15,385 Kim Fields $ 275,000 $ 5,288 $ 100,000 $ 1,923 $ 15,385 Jen Kim $ 80,000 $ 1,538 $ 80,000 $ 1,538 $ 12,308 Joe Smith $ 60,000 $ 1,154 $ 60,000 $ 1,154 $ 9,231

Salary registry

Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 Week 8 Total Bob Edwards $ 1,923 $ 1,923 $ 1,923 $ 1,923 $ 1,923 $ 1,923 $ 1,923 $ 1,923 $15,385 Kim Fields $ 1,923 $ 1,923 $ 1,923 $ 1,923 $ 1,923 $ 1,923 $ 1,923 $ 1,923 $15,385 Jen Kim $ 1,538 $ 1,538 $ 1,538 $ 1,538 $ 1,538 $ 1,538 $ 1,538 $ 1,538 $12,308 Joe Smith $ 1,154 $ 1,154 $ 1,154 $ 1,154 $ 1,154 $ 1,154 $ 1,154 $ 1,154 $ 9,231 Total $ 6,538 $ 6,538 $ 6,538 $ 6,538 $ 6,538 $ 6,538 $ 6,538 $ 6,538 $52,309

Payroll spend plan detail

Full cash compensation covered for 8 weeks Partial cash compensation covered for 8 weeks ($15,385 max per SBA guidance) Simple example profile

• Four-person tech company
• Employer paid healthcare

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Post PPP Loan planning: example

Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 Week 8 Total Payroll $ 6,538 $ 6,538 $ 6,538 $ 6,538 $ 6,538 $ 6,538 $ 6,538 $ 6,538 $52,309 Health benefits $ 1,558 $ 1,558 $ 1,558 $ 1,558 $ 1,558 $ 1,558 $ 1,558 $ 1,558 $12,467 Rent Utilities

Simple example profile

• Four-person tech company
• Employer paid healthcare

This number should map back to the average monthly payroll used to calculate the PPP loan amount; for example, $52,309 + $12,467 = $64,776 (for eight weeks or $32,388 monthly); therefore, it is likely that the PPP loan amount was: Average monthly payroll: $32,388 * 2.5 = $80,970 Accounting for the $100,000 cash compensation cap, planned payroll and healthcare expenses equate to $64,776 or 80% of the PPP loan amount; this leaves $16,194 or 20% to allocate to rent, utilities and other allowable expenses

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Post PPP Loan planning: example

Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 Week 8 Total Payroll $ 6,538 $ 6,538 $ 6,538 $ 6,538 $ 6,538 $ 6,538 $ 6,538 $ 6,538 $52,309 Health benefits $ 1,558 $ 1,558 $ 1,558 $ 1,558 $ 1,558 $ 1,558 $ 1,558 $ 1,558 $12,467 Rent Utilities

Simple example profile

• Four-person tech company
• Employer paid healthcare

End forgivable period Loan disbursed ▶ Remember that any amount not spent in the period or amounts allocated to interest on any other debt

• bligation incurred before February 15, 2020 are not forgivable

▶ Any portion of the loan that is not forgiven will carry an interest rate of 1.0% and is due to be paid back within two years; however, payments for the first six months can be deferred and there’s no pre-payment penalty

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Calculating the amount of loan forgiveness

▶ Generally speaking (and subject to limitations noted below), the amount of loan forgiveness will be equal to the amounts the applicant can document that it paid in the eight weeks following the disbursement of the loan for payroll costs, mortgage interest, rent and utilities ▶ No amounts paid outside of the covered period will be forgiven nor will amounts allocated to interest on any other debt obligation incurred before February 15, 2020 ▶ Directors and company executives encouraged to plan for and manage spend and the various employment and payroll considerations associated with PPP loan forgiveness

• Consistent with the policy of protecting jobs and salary during the COVID-19 pandemic, the

amount of forgiveness for a particular loan will be reduced if the borrower conducts layoffs or reduces salaries

• However, where layoffs or salary cuts occur between February 15, 2020 and April 26, 2020,

the loan forgiveness reduction formula will not penalize the borrower if the layoffs or salary cuts are reversed prior to June 30, 2020 ▶ Anticipate further guidance on forgiveness from lenders and the SBA

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Loan forgiveness haircuts

▶ Loan forgiveness is predicated on how the loan proceeds are utilized over an eight-week period beginning on the date the lender makes the first disbursement of the loan ▶ There are currently three haircut scenarios/tests in play: 1. Use of loan proceeds: 75% or greater of loan proceeds must be spent on payroll costs; failure to maintain this ratio impacts forgiveness 2. Average FTEs: Compare the average full-time equivalent employees (FTEs) during the eight- week period to the average FTEs from February 15, 2019 through June 30, 2019, or January 1, 2020 through February 29, 2020, depending on seasonality; a lower FTE number will result in a corresponding reduction in forgiveness 3. Payroll reductions: If there has been a more than 25 percent reduction in salary and/or wages for any individual employee from the eight-week covered period in comparison to pay during the first quarter of 2020, it will result in a corresponding reduction in forgiveness; in

• rder to truly understand the calculation behind this test, further guidance is required from

the SBA

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Loan forgiveness process

▶ Borrower can submit a request to the lender that is servicing the loan for forgiveness

• request will include documents that verify the number of full-time equivalent employees and

pay rates, as well as the payments on eligible mortgage, lease, and utility obligations

• borrower must certify that the documents are true and that it used the forgiveness amount to

keep employees and make eligible mortgage interest, rent, and utility payments ▶ Lender will likely compare forgiveness documents to documents submitted as part of the loan application

• important to store documents submitted in the loan application process for comparison

purposes ▶ In balancing loan need and PR risk, if the borrower’s circumstances have changed for the better, the borrower can pay back the loan (prior to May 14) and not seek forgiveness

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Audit preparation

▶ Based on SBA and Treasury guidance, during the loan forgiveness process, many borrowers will be subject to audit ▶ More guidance is expected, but in addition to board memos outlining the need for the PPP loan, companies should consider elements of the SBA 7(a) loan checklist which may be subject to audit as part of the loan forgiveness process:

• 941s / period payroll reports
• Lease(s)
• Deed(s) for property
• Mortgage(s) on property
• Bills for rent
• Bills for interest on mortgage
• Utility bills
• Proof of payment of payroll, rent, interest, utility
• Business license
• Financials from 2019
• Financials for 1st and 2nd quarter 2020
• To bolster need
• Forecast before COVID-19
• Forecast after COVID-19

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Other programs to consider: tax related

Deferred payment

• f employers

portion of social security payroll tax (6.2%) otherwise due for the period ending December 31, 2020. Such deferred taxes are due in two installments: 50% by December 31, 2021, and 50% by December 31, 2022

Deferral of employer Social Security taxes

Refundable tax credit against employment taxes paid by eligible employers in an amount equal to 50% of the first $10,000 of “qualified wages” paid to employees

Employee Tax Retention Credit

Ability to utilize NOLs to offset taxable income and to generate refunds is substantially expanded

Use of net operating losses (NOLs)

Makes corporate AMT credits refundable in cash without regard to the income and

• ther limitations of

Section 53(c)

Use of corporate AMT credits

Increases the base for interest deductibility to 50%

• f EBITDA (from

30%) and allows taxpayers to elect to use EBITDA from 2019 for the taxable year 2020

Increase in base for interest deductibility

Permits 100% expensing/immedia te write-off for costs incurred by a taxpayer to fund improvements to the interior portion

• f nonresidential

real property

Expensing of improvements

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Other programs to consider: Main Street Lending

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New loan facility Expanded loan facility Priority loan facility ▶ Borrower may apply to an eligible lender for term credit that has a four-year maturity with payments deferred during the first year, has an interest rate of LIBOR plus 3%, and is pre-payable without penalty ▶ As part of the loan application, the applicant will provide to the lender a number of certifications to establish that the applicant meets the criteria of an eligible borrower and will need to agree to restrictions on certain capital distributions and compensation ▶ Ultimate decision whether to extend credit to the applicant will rest with the lenders who should "apply [their] own underwriting standards in evaluating the financial condition and creditworthiness of the borrower“ ▶ The Federal Reserve made clear that participation in the SBA PPP does not prohibit a borrower from also participating in the Main Street program ▶ The Federal Reserve has indicated it shall purchase up to $600 billion in participating loans ▶ The infrastructure and paperwork supporting the operations of the program have yet to be made public, but are forthcoming Minimum size $500,000 $500,000 $10,000,000 Maximum size $25M or less based on 2019 adjusted EBITDA formula Security and priority Need not be secured; must not be contractually subordinated to other loans or debt $25M or less based on 2019 adjusted EBITDA formula $200M or less based on 2019 adjusted EBITDA formula Senior to or pari passu with

• ther loans or debt

instruments Upsized tranche senior to or pari passu with other loans or debt instruments

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A look ahead: what’s next

▶Continued scrutiny borrower “necessity” and forgiveness ▶Many interpretive questions, particularly on forgiveness, remain unanswered; Treasury and the SBA have indicated additional guidance by May 14 ▶Fourth COVID-19 response/relief/recovery package introduced May 12 in the House includes substantial revisions to PPP Loan program, including:

• extension of the PPP Loan Program through 12/31/20
• allowance for PPP recipients to also defer payroll tax payments
• set-asides for businesses with fewer than 10 employees
• set-asides for loans through community financial institutions and
• broadened eligibility for critical care hospitals and local news media

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Thank you