US aid package: More PE portfolio companies eligible for small business loans

The US government’s new $2.2 trillion coronavirus aid package will make more private equity funds’ portfolio companies eligible for small business loans, lawyers say.

Posted jeudi, mars 26 2020
US aid package: More PE portfolio companies eligible for small business loans

Under the terms of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, changes made to the Small Business Administration’s (SBA) Loan Guarantee Program – also known as the 7(a) program – will enable any business with fewer than 500 employees entitled to obtain a 7(a) loan without the need to be a “small business concern.”

In a briefing note, law firm Perkins Coie said the changes “would be a significant departure from current law under which the test for 7(a) loan eligibility requires a company to count the employees or revenue of all its affiliates in determining whether it meets the applicable small-business size standard".

For example, under currently applicable rules, a company with 250 employees that is owned by a private equity fund would not meet a 500-employee size limit if the same fund also controls other companies that, together with the borrower and the PE fund, employ another 300 employees.

The briefing note added that limiting the eligibility test to 500 employees, without regard to the “affiliation analysis that typically applies to determining a ‘small business concern’” would suddenly make these loans available to more private equity portfolio companies.

In addition, the loan forgiveness features of the CARES Act have also “caught the eye” of private equity funds, Perkins Coie said. “Depending on the portfolio company’s situation, these features may or may not be helpful,” the briefing note explained. “Loan forgiveness would only apply to that portion of indebtedness associated with maintaining ‘payroll continuity’ during the period March 1, 2020, to June 30, 2020 (the covered period). Loan forgiveness would not apply to proceeds used to pay rent, vendors, existing debt obligations, and the like.”

The firm added that the amount of loan forgiveness would be reduced to the extent that the number of full-time equivalent employees during the covered period is less than the number during the period from March 1, 2019, to June 30, 2019. “There would also be reductions to the extent that employee wages are reduced in excess of 25 per cent”, the note added. “This feature would only apply to employees making less than $100,000 per year, which would exclude most senior management of portfolio companies.”