While a lot has been written and said about the “need” certification when it comes to the Paycheck Protection Program, particularly for public companies, the SBA and Treasury have been relatively quiet about how many borrowers that received PPP funds elected to to take advantage of the government’s subsequent safe harbor to return funds. In connection with the forgiveness process, the SBA has indicated that it will review all loans in excess of $2 million, but will deem all borrowers of $2 million or less to have made the required certification concerning the necessity of the loan request in good faith.
Based on our analysis below, 88% of public borrowers that received PPP loans elected to retain their PPP proceeds, and 75% of borrowers approved for PPP loans of between $5 and $10 million did the same. Based on our discussions with PPP borrowers throughout the country, we think this is consistent with the economic uncertainty that was created by the coronavirus.
Based on a review of SEC filings, Bryan Cave Leighton Paisner identified over 850 borrowers who indicated that they had received PPP loan approvals. 107 of these borrowers, or roughly 12 percent, subsequently indicated that they either ultimately did not accept the loan, or returned the loan proceeds. About 25% of public companies who returned their loans had PPP borrowings that were less than the $2 million threshold for review indicated above.
Of the 759 public companies that elected not to return their PPP funds, approximately 73% received $2 million or less, while the remaining 27% had PPP loans of more than $2 million. About 8% of the public company recipients received less than $100,000, while over 55% received less than $1 million.
By our calculations, about 200 public companies with PPP loans in excess of $2 million elected to retain their PPP loans. About 60% of these loans were for between $2 and $5 million, 36% were for between $5 and $10 million, and 4% were for in excess of $10 million. (While PPP loans were generally limited to $10 million, some borrowers were eligible, in the aggregate, to borrower more than $10 million either due to multiple subsidiaries or special rules for small businesses in the hospitality industry with multiple physical locations.) Given the economic uncertainties present in March and April, we believe the vast majority of these borrowers, if not all of them, will be able to demonstrate the good faith basis of their “need” certification in connection with their PPP loan application, however these borrowers should fully document their “need” certification prior to filing their PPP forgiveness application.
Throughout the Paycheck Protection Program, the SBA has periodically published aggregate data on approved PPP loans. These reports initially included all approved PPP loans, but starting in the middle of May, the SBA began to exclude loan cancellations when reporting new totals. These loan cancellations included duplicative loans, loans not closed for any reason, and loans that had been paid off (although no details were provided for the total loan cancellations, or for any of the constituent categories). If early July, the SBA then published individual loan data for PPP borrowers that received in excess of $150,000 in proceeds. As this data included the date the PPP loans were approved, we were able to compare the individual loan data with the previously announced aggregate SBA data, with a particular focus on loans of between $5 and $10 million.
In the SBA Report on the First Round of PPP loans, the SBA reported there were 4,412 approved loans for between $5 and $10 million. Based on the individual loan data, 3,582 PPP borrowers of between $5 and $10 million dollars had their PPP loan approved during the first round of PPP loans. This indicates 830 PPP approved loans (representing at least $415 million) were subsequently cancelled (but also that at least 81% of such borrowers elected to retain their PPP loan despite the hoopla around FAQ 31 and general questioning of larger PPP borrowers). To put the events in chronological framework, the first round of PPP loans were approved between April 3rd and April 16th, when the initial allocation was exhausted.
On April 23rd, the Treasury and SBA published FAQ 31, which indicated “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 SBA, upon request, the basis for its certification.” FAQ 31 further provided that PPP borrowers that repaid the loan by May 7, 2020 would be deemed to have made the required “need” certification in good faith.
On April 28th, FAQ 37 was published confirming that FAQ 31 also applied to private companies. On April 29th, FAQ 39 was published indicating that the SBA intended to review all loans in excess of $2 million for compliance with the “need” certification.
Contemporaneously with these later FAQs, round 2 of the SBA program commenced, with the first approvals starting on April 27th. The SBA Report for Round Two through May 1, 2020 showed 1,472 new PPP borrowers of between $5 and $10 million. However, the individual loan data shows only 1,130 PPP loans of that size being approved between April 27 and May 1. This indicates almost 600 additional cancelled loans during this period. (As a reminder, at the time, it was thought that the second round of PPP loans could be exhausted quickly, and lenders had queued up applications for processing. Many of these loans may have been submitted prior to FAQ 31 and the resulting news coverage. We also heard many reports of borrowers applying for PPP loans with multiple borrowers, which may have ultimately increased the number of duplicative loans that were ultimately not closed.)
On May 5th, the Treasury and SBA published FAQ 43, extending the return deadline to May 14th. On May 13th, FAQs 46 and 47 described the review process (in generic terms) and extended the safe harbord return deadline to May 18th (although also provided that if the SBA determined that a borrower was not eligible, but the borrower promptly repays the loan after receiving notification from SBA, the “SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request”).
Using the SBA Report for Round Two through May 8, 2020 (but backing out those loans reported in the earlier report), an additional 76 loans in the $5 to $10 million bucket were approved from May 2nd through May 8th. However, only 256 loans were approved during this time period that remained outstanding in the individual loan reports. Although not indicated in the SBA Report, this presumably indicates that the May 8, 2020 report began backing out cancelled PPP loans.
May 16th and subsequent SBA Reports explicitly backed out cancelled PPP loans. While this prevents us from seeing a full picture of the number of PPP loans that were approved but ultimately cancelled, it did allow us to confirm that some PPP borrowers continued to return PPP funds throughout the month of May and June. While the SBA Reports showed a net decline from 5,071 loans of $5 to $10 million at May 16th to 4,840 loans at June 30th, factoring in the individual loan data, we show 105 new loans of that size during the time, more than offset by the return of 336 loans.
In all, we believe approximately 1,400 PPP loans that were approved for between $5 and $10 million were subsequently not closed or were returned by the borrower. Most (about 75%) of these loan cancellations appear to have been cancelled quickly, reflecting either duplicative or non-closed loans, or the borrower promptly deciding to return the funds following FAQ 31. However, approximately 260 borrowers repaid their loans in the second half of May, and another 70 borrowers repaid their PPP loans in June.
More importantly, it appears that notwithstanding the fearmongering of FAQ 31, the negative media attention and related political scrutiny, over 75% of PPP borrowers approved for a PPP loan in excess of $5 million decided to retain their PPP loan, apparently trusting their earlier determination that they had a good faith belief that they needed to apply for the PPP loan in light of COVID-19.