May 20, 2020

PPP Loans: Are Public Company Borrowers Really the Bad Guys?

Yesterday, I blogged about the SEC’s apparent initiation of an enforcement sweep targeting public companies that borrowed money under the Paycheck Protection Program.  Public company borrowers have been sharply criticized by the media, lawmakers, and the Secretary of the Treasury himself.  But is it fair to lump all public companies together as the bad guys – or are some just convenient scapegoats for a program that simply hasn’t been well administered?

This NY Times article provides a more nuanced picture of public company PPP borrowers and the plight many of them face than has been presented in other media reports.  While the SBA’s guidance says that the government will be skeptical when it comes to need certifications from public companies with “substantial market value” and “access to capital markets,” it still isn’t entirely clear what those terms mean. Furthermore, this excerpt from the article about a small cap called RealNetworks suggests that – no matter how you define the terms – it’s hard to conclude that a lot of small caps have either substantial market value or access to the capital markets at this time:

RealNetworks struggled, too, as the pandemic transformed American life. The company went public during the dot-com boom of the 1990s, only to see its stock fall in the subsequent bust. In recent years, it has marketed a facial recognition product to casinos and airports, among other venues. But its share price has fallen. At the end of February, it was hovering just above a dollar. Then the virus crippled travel and hospitality businesses. Companies that had been possible clients before the pandemic made it clear that they wouldn’t engage its services this year.

Rob Glaser, RealNetworks’ chief executive, said the pandemic had put a “bull’s-eye” on the company’s facial recognition offering. He said it was “not as devastating to our company as if we were a cruise ship company or an airline or a restaurant chain, but we were directly affected.”

RealNetworks qualified for $2.9 million and got its loan. According to the article, it has apparently decided to keep it. That doesn’t seem unreasonable to me. The company’s market cap is $44 million, its stock closed on Tuesday at $1.18 per share, and it received a delisting notiice from Nasdaq the day before it received its PPP loan. In terms of access to capital, the company’s most recent financing came entirely from the pockets of its CEO.

Some public companies that received PPP loans clearly shouldn’t have, but the same is also true for some private companies. I mean c’mon – the Lakers? In any event, it’s hard for me to see a small cap public company like this one being anybody’s idea of poster child for abusive conduct. Lumping all “public company borrowers” together as being unworthy participants in the program just doesn’t reflect reality.

PPP Loan Forgiveness: It’s Complicated. . . 

The SBA issued its PPP loan forgiveness application last week, and it’s apparently pretty complicated.  Here’s an excerpt from Crowell & Moring’s memo on the application:

On May 15, 2020, the Small Business Administration (SBA) released the Paycheck Protection Program Loan Forgiveness Application which is comprised of a PPP Loan Forgiveness Calculation Form (SBA Form 3508), including related certifications, and worksheets to assist in making the calculations. Although the SBA has yet to release further guidance on PPP Loan forgiveness, the Loan Forgiveness Application does provide some guidance on elements of forgiveness that were not clear from either the text of the Cares Act, or the SBA’s Interim Final Rules and FAQs. However, the complexity of the application and the onerous submission requirements present challenges for small businesses and create a further need for guidance and legal/accounting support.

I took a look at the application, and it does appear to be fairly daunting. For example, there’s an entire page of instructions devoted solely to the payroll, FTE, & non-payroll documentation that must be submitted with the application or retained by the borrower. In keeping with the government’s “Ready. . . FIRE!. . .Aim” approach to this program, now that the SBA has published the application, it will eventually tell people how they are supposed to complete it.

Tomorrow’s Webcast: “Middle Market M&A – The Latest Developments”

Tune in tomorrow for the webcast – “Middle Market M&A: The Latest Developments” – to hear to hear Citizens M&A Advisory’s Charles Aquino, Mintz Levin’s Marc Mantell and Duane Morris’s Richard Silfen discuss the state of the middle market and issues dealmakers are confronting in 2020, including bridging valuation gaps, Covid-19’s implications for deal structure and process, and the evolution of deal terms in the Covid-19 environment.

John Jenkins