Banking and Business Monthly – June 2020

While PPP loans have provided welcome relief for businesses affected by COVID-19, if a company already has a secured loan facility, PPP loans may not be permitted by an existing loan facility. A borrower and lender may need to amend the existing loan agreement to allow for the PPP loan. Among the terms to be considered in such an amendment are as follows:

If not already covered, the lender should specifically permit the PPP loan as a carveout or exception from the borrower’s negative covenant not to incur or assume any further debt. Negotiations may arise over the amount of the PPP loan to be permitted, such as the lender only permitting the amount of the PPP loan it expects to be forgiven by a certain date. Structuring the carveout in this manner incentivizes the borrower to timely apply for PPP loan forgiveness.

To ensure its borrower is adhering to the PPP loan requirements, a lender could request certificates from the borrower, confirming the borrower has been using PPP loan proceeds for forgivable purposes and maintaining and providing related records. For example, to receive loan forgiveness under a PPP loan with respect to payroll payments, a borrower will be required to submit documentation verifying the number of employees at the time of its PPP loan application and the time of its forgiveness application, as well as the cash compensation paid to such employees during the covered period. Therefore, a lender may require its borrower to deliver estimated amounts of allowable uses of the PPP loan proceeds to the lender, with weekly updates until the PPP loan is forgiven setting forth any material changes to such estimated amount.

To the extent a PPP loan may be forgiven, a borrower may request that a lender carve out the expected forgivable amount from the calculation of the borrower’s debt for purposes of financial covenant calculations. While this request seems fair from the borrower’s perspective because the amount forgiven is not true debt, because PPP loan forgiveness is a process and is not guaranteed, the lender may also want to negotiate a provision allowing for an addback to the extent that any amount of the PPP loan is determined to be unforgivable. Similarly, the parties should ensure that PPP loan proceeds are not included as income in any calculation of a borrower’s net income or EBITDA for financial covenant purposes.

A lender may want to classify as a “prohibited payment” any amount paid by the borrower (a) in repayment or prepayment of interest or principal of the PPP loan, or (b) made using proceeds of the PPP loan, so as to control the timing and amount of such payments, to provide for certain conditions to first be met, and/or to ensure such amounts are used for forgivable purposes.

Lenders should review the existing loan documents to ensure whether an amendment needs to be added to deem any default under the PPP loan as a default under the existing loan documents.

If you have any questions about amendments to existing loan documents in light of PPP loans, please contact me at smigala@lavellelaw.com or 847-705-7555.