Consistent with the FAQs and the Interim Final Rule released by the Small Business Administration (SBA) with respect to the PPP, private equity firms themselves are ineligible for Main Street loans, and loans to their portfolio companies would be subject to the same type of affiliation rules that are used for the SBA’s PPP program, albeit with higher employee numbers (15,000 employees instead of the 500 for PPP loans), and that may make such loans inaccessible for many middle-market portfolio companies. Even for companies able to access the loans, the formula for calculating loan size based on 2019 EBITDA1 – and for secured loans requiring senior status and 200% collateral coverage – might make the size of the loan available unhelpfully small, especially after taking into account the accompanying business and operational restrictions. Restrictions of particular note are: (1) executive compensation caps2, (2) employee retention requirements3, (3) prohibitions on paying down prior debt4, and (4) restrictions on dividends, capital distributions and stock buybacks5.
Although not yet operational, we fully expect the Main Street program to have continual changes and updates similar to those that left many PPP recipients afraid to use PPP loan proceeds. Given the uncertainty, sizing and business restrictions, we would encourage companies and financial sponsors to consider their options, including private sector liquidity solutions.
In the early part of the cycle, private equity funds and their portfolio companies were focused on existing lenders and discussions around easing covenants, drawing on revolvers and incremental availability. In more recent weeks, we have seen a number of new creative liquidity solutions, including the use of new fund level leverage and opportunistic NAV facilities, asset transfers to unrestricted subsidiaries, specific asset class financings (including those focused on the value of intellectual property, inventory and unencumbered real estate), asset sales/M&A and infusions of preferred equity. We expect these trends to become more commonplace, but in order to get sponsors and their portfolio companies ready both for Main Street and private solutions, we would encourage businesses to consider the following questions: