Considerations for Paycheck Protection Program Loans Under Existing Credit Facilities

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) recently enacted by the US Congress, among other things, created a $349 billion Paycheck Protection Program (“PPP”) to support new loan guarantees and subsidies. The program provides welcome liquidity for many small businesses amid the COVID-19 pandemic outbreak, but also raises questions for existing lenders as to how PPP loans should be treated under their existing credit facilities.

Many borrowers may find that their PPP loans do not fit within their existing permitted indebtedness baskets (including any unsecured or “general” baskets) or may wish not to utilize those baskets for PPP loans. We recommend that lenders consider the following issues when negotiating and documenting accommodations to allow borrowers to utilize the Paycheck Protection Program.

1. PPP Loan Terms. To the extent existing lenders are willing to provide a new PPP loan basket, they should require that such PPP loans be unsecured and consider whether to cap the permitted indebtedness amount. Loans under the PPP are generally limited to the lesser of $10 million or 2.5 times the average monthly payroll expenses of such borrower. Many lenders may look to restrict borrowers’ ability to incur PPP loans to a lesser amount based on the borrower’s liquidity needs for payroll, rent, utility and other eligible expenses.

2. Representations by Borrower. Lenders should consider requiring that the borrower represent and warrant to the lender that (i) the borrower (and any of its applicable affiliates) meets the eligibility requirements for receipt of the PPP loan and for forgiveness of all or a portion of the principal amount of such PPP loan, (ii) all representations and warranties made by the borrower and its affiliates to the PPP loan provider or the Small Business Association (“SBA”) are true and correct in all material respects and (iii) the existing lender is not an “affiliate” for purposes of the PPP application.

3. Affirmative Covenants. Lenders should also consider including affirmative covenants that:

a. require compliance with the CARES Act, including provisions limiting the use of proceeds of the PPP loans to purposes allowed thereunder and, if more restrictive, to the purpose specified by the lenders;

b. require the borrower to maintain appropriate records with respect to the PPP loan;

c. require the borrower to take all actions necessary for all or a portion of the principal amount of the PPP loan to be forgiven in accordance with the CARES Act and apply for forgiveness within a specified time period;

d. require that the borrower segregate the proceeds of the PPP loan from other cash; and

e. require the borrower to provide the existing lender with additional information regarding the status of PPP applications and PPP loans, including notice of any materially adverse events under the PPP loan and of receipt of written correspondence from a PPP lender or the SBA.

4. Negative Covenants. Lenders should consider including negative covenants that:

a. prohibit amendments to the PPP loan if such amendment would (i) shorten the final maturity or average life to maturity of or require any payment to be made earlier than the date originally scheduled therefor, (ii) increase the rate of interest applicable to the PPP loan, (iii) add any covenant or event of default, (iv) cause any part of the PPP loan to be ineligible for forgiveness or (v) otherwise be adverse to the lenders; and

b. restrict the borrower’s ability to make voluntary or optional payments with respect to the PPP loan (excluding as a result of the forgiveness of the PPP loan).

5. Other Credit Agreement Considerations. Although it is too early for a market consensus on PPP-related terms to have emerged, we are seeing many parties address the following items in the related documentation.

a. Mandatory Prepayments. Lenders should ensure that proceeds of PPP loans are excluded from mandatory prepayment requirements and not caught in any sweep of the borrower’s accounts.

b. Financial Covenants. Many borrowers are seeking to carve out PPP loans from indebtedness definitions for purposes of financial covenant calculations, particularly for leverage and fixed charge tests. Lenders have shown some willingness to accommodate these requests so long as the PPP loans remain forgivable. Conversely, some lenders are looking to exclude the proceeds of any permitted PPP loans for purposes of liquidity and net leverage tests. We suggest resolving these issues in light of the particular borrower’s circumstances and risk profile.

c. Events of Default. Many lenders are updating their existing credit agreements to include a cross-default to the PPP loan documents in cases where the PPP loan is not covered by existing cross-default provisions.

d. Acknowledgments. In many cases, lenders are requiring an express acknowledgment from the borrower that it has not relied on the lenders with respect to any aspects of the CARES Act and that the accommodation being provided does not constitute a waiver of any lender’s rights or otherwise establish a course of dealing with the borrower. Some lenders are further requiring that borrowers release any existing legal claims under the credit facility in connection with granting any PPP-related accommodations.

6. Intercreditor Considerations. Lenders should be mindful to consider any PPP-related accommodations in the context of the applicable facility’s legal structure. Cash dominion and cash-sweeping mechanics typical in asset-based facilities may raise the possibility that PPP loan proceeds are “swept” to the revolving lender or are otherwise unable to be used for the purpose required under the CARES Act or the credit facility documentation. Accordingly, lenders under these facilities may require that the proceeds of the PPP loans be deposited only into certain accounts of the borrower. In addition, if the asset-based or “first-out” lender in a split-lien or unitranche structure is the bank providing the PPP loan, the other lenders should consider an express acknowledgment from the asset-based or “first out” lender that the PPP loan is not part of the “Obligations” secured by the collateral or otherwise entitled to any priority treatment under the applicable agreement among lenders or intercreditor agreement.

7. Additional Considerations. Lastly, lenders should note that many of the details of the PPP loans remain unknown, and it is unclear whether borrowers who have defaulted under their existing credit agreement, or are otherwise insolvent, may take advantage of the program. The PPP loan documentation should be carefully reviewed as it becomes available to ensure no additional issues should be addressed when negotiating the points raised above.

For more information about the topics raised in this Legal Update, please contact the authors or any other member of Mayer Brown’s Banking and Finance practice. For additional perspectives regarding the Paycheck Protection Program, please see our US Cares Act page. Our team of experienced lending lawyers is continuing to monitor ongoing developments with respect to Paycheck Protection Program and expects to provide additional updates as they arise.