Goldberg Kohn

Update - What To Expect in the Days to Come
Top Lender Issues re COVID-19[1]

April 21, 2020
  1. Paycheck Protection Program Loans—The entire $349 billion authorized under the PPP loan program was fully allocated last week, though we anticipate a successive round of Congressional funding of PPP. Although the requirements for PPP loans bar many private equity backed Borrowers from broad participation in the PPP, we have seen a meaningful number of private equity backed Borrowers qualify if they are restaurants, franchises or if they have loans or other investments from an approved SBIC.  Certain private equity sponsors have also explored obtaining PPP loans under the “alternative size test”.  That test requires that across the sponsor’s entire portfolio of companies (a) aggregate tangible net worth (in general terms, equity less goodwill) is less than $15,000,000, and (b) average net income of all portfolio companies for 2018 and 2019 is less than $5,000,000.

  1. Consents to Paycheck Protection Program Loans—Under most credit agreements, requisite lender consent is needed to permit the Borrower to incur the PPP loan. Lenders have generated consent forms, ranging in length and approach from simple bare bones consents to more detailed credit agreement amendments.  As a general matter, cash flow lenders have more extensive documentation as compared to ABL lenders.  Aside from providing consent for the incurrence of the PPP loan, the documentation addresses some or all of the following:

    Borrower agrees to promptly apply for PPP loan forgiveness, and represents at closing that the PPP loans should be forgiven based on expected application of loan proceeds

    PPP loan proceeds to be used solely for purposes that will result in forgiveness

    When, if at all, will the PPP loan constitute debt for covenant purposes?  Oftentimes only the unforgiven portion will be included.

    Exclude PPP loan proceeds from leverage ratio cash netting

    Borrower agrees that it has not relied upon Lenders in preparing the PPP loan application or obtaining the loans, and that Lender played no advisory role

    Add representation that Borrower  satisfies all conditions for obtaining a PPP loan; PPP loan application is true and correct in all material respects

    Borrower to send Lender copies of PPP loan application,  material PPP loan documents and evidence of PPL loan forgiveness

    PPP loan proceeds to be placed in a segregated account, not subject to the control or springing control of Lender

    No optional prepayment of PPP loans

    Add cross-default to PPP loan documents, unless covered by the existing debt cross-default provision

  2. Mid-and Long-Term Solutions—After addressing Q1 2020 principal and interest payments, Borrowers and Lenders have turned their attention to longer term fixes. Some fixes are addressing Q2 and Q3, others are addressing the remainder of 2020 and into 2021.  Terms being addressed include:

    Sponsor support to address liquidity needs (in the form of new equity, subordinated debt, unsecured pari passu debt or pari passu secured (but silent) debt)

    Waiving financial covenant defaults or forbearing from exercising remedies; resetting financial covenants

    Adjusting pricing

    PIK’ing some portion of interest payments

    Deferring certain amortization payments

    Adding or increasing LIBOR floors

    Deferring the payment of management fees

    Inserting liquidity covenants

    Requiring delivery of 13-week cash flow forecasts

    Permitting LIBOR borrowing notwithstanding prior defaults

    Revisiting EBITDA addbacks

    Ignoring 2020 results and implementation of EBITDA builds commencing 1/1/2021

    Shoring up collateral and guarantee positions, and limiting previously agreed collateral and guarantee exclusions (particularly with respect to collateral and guarantees pertaining to foreign subsidiaries)

    Limiting or prohibiting “Permitted Acquisitions”, use of “Available Amount” baskets, and investments in unrestricted or foreign subsidiaries (reducing opportunities for leakage)

    Permitting delayed delivery of audited financials; permitting delivery of qualified audits

    Adding anti-hoarding other loan funding conditions

  3. New Deals—The message that we have been receiving from most of our clients is consistent, “We want to see new deals, although we will need to see a thorough impact analysis for the expected effects on the business of COVID-19, and we will require higher pricing, lower leverage and more favorable credit agreement terms.” UPDATE: We have seen new ABL deal activity (although fewer deals versus pre-COVID-19), existing ABL upsizes and add-ons to be financed with ABLs.

  4. Additional Government Support—Two weeks ago we were all learning about PPP loans.  In the weeks to come we may turn our attention to the Main Street Lending Program, yet another means by which the Fed hopes to infuse the financial marketplace with liquidity.  The program contemplates two distinct types of loans:  the Main Street New Loan Facility (MSNLF) and the Main Street Expanded Loan Facility (MSELF).  Both types of loans would be structured through the Fed's establishment of a special purpose vehicle to purchase 95 percent participations in loans originated by eligible lenders, with those lenders retaining exposure for 5 percent of the program loans.  Unlike PPP loans, Main Street Loans can be made to eligible borrowers only by S. insured depositories, U.S bank holding companies and U.S. savings and loan holding companies, and the loans are not forgivable. Eligible borrowers must be organized in the U.S, have significant operations in the U.S., have less than 10,000 employees or less than $2.5 billion in 2019 annual revenue and may not participate in other government loan programs (although PPP participation is expressly permitted).  The MSNLF program would authorize only unsecured loans made to eligible borrowers in the maximum amount equal to the lesser of (i) $25 million and (ii) 4 times EBITDA of the eligible borrower for calendar year 2019, after giving effect to all other eligible borrower indebtedness (including committed but undrawn facilities).  The MSELF program would authorize only the increase of pre-existing term loans made by a qualified lender to an eligible borrower, with such increases capped at the least of (i) $150 million, (ii) 30% of the eligible borrower's existing outstanding and committed but undrawn bank debt and (iii) 6 times EBITDA.  There is a lot of uncertainty surrounding the specifics of the Main Street Lending Program, including how EBITDA should be defined, how the required SOFR interest rate would be implemented and how to address intercreditor issues. We anticipate material modifications to the Program as a result of public commentary.  As such, rather than speculate, we will disseminate updated information as available. 

  5. File ReviewsWith respect to the most troubled Borrowers, Lenders should consider having counsel review the Loan Documents for missing materials, additional available collateral, unperfected collateral or documentation holes that can be fixed as part of a waiver, forbearance or amendment. UPDATE: Lenders appear to be evaluating their loan portfolio and contacting us to address issues pertaining to those Borrowers who have been, or are likely to be, most severely impacted by COVID-19, or ones who were previously experiencing financial difficulty and for which COVID-19 presents a tipping point.

[1] If you missed our March 23 or our March 30 alert you can find a copy on our website and our LinkedIn page.

April 21, 2020

Questions? Please contact:

Commercial Finance Practice Group

Bankruptcy & Creditors' Rights Practice Group

The material in this client alert is based on information existing at that time. It should not be construed as legal advice or legal opinions based on any specific set of facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, an attorney-client relationship.

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