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MARCH 5, 2020

PPP Loan Certification: the Need for Caution Continues!

APRIL 23, 2020

As expected, the House of Representatives has passed the $480B coronavirus relief package that will serve to provide financial help to small businesses and hospitals feeling the sting of the coronavirus pandemic and expand COVID-19 testing. Most significantly, the legislation, which will now go to the President for signature, injects another $310B into the Paycheck Protection Program.

Regarding the PPP, there has been growing backlash directed at larger, well-capitalized companies that have received these loans through the Small Business Administration—this despite the requirement that every business certify in its Borrower Application Form that “current economic uncertainty makes [the] loan request necessary to support the ongoing operations of the Applicant.”

In a prior alert, Michelman & Robinson emphasized how important it is for borrowers to proceed with caution given the PPP’s certification mandates. This is particularly true in light of U.S. Treasury Secretary Steve Mnuchin’s recent comment that, “there [will be] severe consequences” for PPP borrowers that have improperly certified their need for relief under the CARES Act.

As such, beyond the size requirements applicable to entities seeking PPP loans, it is important that borrowers—and would-be borrowers—seriously consider whether their loan requests are necessary in the first place given their particular circumstances. With that in mind, the U.S. Treasury Department issued the following guidance today:

Q. Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan

A. 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 the 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 7, 2020 will be deemed by SBA to have made the required certification in good faith.

The Takeaway From Treasury’s Statement

When our prior alert regarding PPP certification was distributed, neither the SBA nor Treasury had issued guidance explaining the circumstances that might make a PPP loan necessary for any given business. Now that the Treasury has spoken on the topic—at least in terms of companies with adequate sources of liquidity—M&R can offer the following observations:

  • First and foremost, Treasury’s guidance should not serve to dissuade companies that need PPP relief from applying for it. As otherwise stated, the fear of “severe consequences” as referenced by Secretary Mnuchin should not be a deterrent for businesses rocked by the COVID-19 crisis, though companies adversely impacted by the coronavirus outbreak should adhere to our previously-made suggestions (e.g., when applying for loans, each borrower should create a comprehensive record supporting the proposition that COVID-19 and the resulting economic volatility or hardships to its business justify the loan request).
  • That being said, every borrower must carefully assess its economic need for a PPP loan and be able to certify in good faith that current economic uncertainty makes a loan request necessary to support ongoing operations. In so doing, each borrower needs to consider its ability to access other sources of liquidity not significantly detrimental to its business.
  • As Treasury now makes clear, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required PPP certification in good faith. To the extent such an entity seeks a PPP loan nonetheless, it should be prepared to demonstrate to the SBA the basis for its certification.
  • Finally, for existing borrowers wary about the necessity of their PPP loans in the wake of Treasury’s guidance, they will be deemed by the SBA to have made the required certifications in good faith so long as their loans are repaid in full by May 7, 2020.

Bottom line: it is essential for borrowers to establish that their PPP loan requests are necessary to support ongoing operations, which is why another look at our prior alert (again, here) regarding mitigation of the issue and demonstration of good faith is highly recommended.

We are working diligently to keep our clients up to date on coronavirus-related developments. Nevertheless, these developments are changing daily and, in some cases even hourly, so it is important that you make sure you are dealing with the most current information. That being said, this alert is not offered, and should not be relied on, as legal advice. You should consult an attorney for guidance and counsel regarding any specific concern or situation.