Understanding the CARES ACT PPFA

New legislation provides flexibility in forgiveness and repayment terms for PPP Loan Borrowers.

On June 5th, 2020, the Paycheck Protection Program Flexibility Act (PPFA) was signed into law, providing additional flexibility in the forgiveness and repayment terms of this popular Paycheck Protection Program created by the CARES Act.

In the following we will describe many of the key changes and what they mean for PPP loan borrowers.

Key Points from the Paycheck Protection Flexibility Act (PPFA)

PPP Loan Use “Covered Period” Extended to 24 Weeks

The “covered period” during which PPP loans can be used has been extended from eight weeks to 24 weeks, from date of loan origination. Loan recipients may choose to maintain the eight week timeline. There is a hard cap of December 31, 2020.

What it means: The original eight-week period PPP loans were to be used in has proven insufficient as the economic fallout from the COVID-19 pandemic has continued for many businesses. The extended deadline is meant to help businesses maximize the forgiveness potential of the loans. The ability to adhere to the original eight-week deadline is also notable, as businesses that have recovered will be able to seek forgiveness when they are ready.

Payroll Expenditure Requirement Lowered to 60%

Borrowers now need to use 60% of funds to support payroll to meet forgiveness requirements. The prior level was 75%. However, the 60% limit now becomes a cliff, meaning at least 60% of funds MUST be used on payroll or there is no loan forgiveness.

What it means: One of the biggest criticisms of the original PPP loan terms was the 75% usage requirement for maintaining payroll, as many businesses had other pressing needs (rent/lease payments, supplier payments, utilities, etc.) superseding or directly connected to the need to maintain payroll levels. Lowering the payroll threshold to 60% is useful, while also reemphasizing the purpose of the loans being for maintaining payroll through implementing the “cliff” dynamic.

Deadline for Restoring Full Workforce Extended to 24 Weeks

Borrowers now have 24 weeks, or a hard deadline of December 31, 2020, to meet the forgiveness condition of restoring workforce levels to pre-pandemic levels. Previous deadline was June 30, 2020.

What it means: As the economic fallout from the COVID-19 pandemic continues, this is a very welcome change, as many borrowers are not yet near former operational levels. This makes returning workforce to pre-pandemic levels nearly impossible for many borrowers.

More Exceptions for Restoring Workforce Forgiveness Condition

If a PPP borrower cannot restore prior workforce levels due to the inability to find qualified help, or have not restored prior business operations to pre-pandemic levels, their loans remain eligible for forgiveness.

What it means: Previous guidance allowed borrowers to exclude from payroll calculations employees who turned down ‘good faith’ offers to be rehired at pre-pandemic hours and wages. Creating two further exceptions makes sense as many businesses may not be able to return to previous workforce levels, possibly for years to come. Businesses seeking these exclusion will need to be able definitively document these conditions when seeking forgiveness terms through their lender.

PPP Borrowers Have Five Years to Pay Back Loans

PPP loans can be extended to five years if borrower and lender agree. The previous timeline was two years. Loans extended to five years will maintain the 1% interest rate.

What it means: Additional flexibility in repayment terms is another welcome change as economic conditions remain difficult for many businesses.

PPP Borrowers Can Delay Payroll Taxes

PPP loan recipients are now eligible for the payroll tax deferral created by the CARES Act. Previously, receiving PPP loans disqualified businesses from the payroll tax break.

What it means: In the CARES Act legislation that created the PPP program, there were tax credits and incentives designed to help struggling businesses. One essential option was the ability to defer the deposit and payment of the employer’s portion of social security taxes that otherwise would be due between March 27, 2020, and Dec. 31, 2020. Employers could instead to deposit half of deferred payments by the end of 2021 and the other half by the end of 2022.

Support for Maximizing PPP Loan Forgiveness

The Payroll Protection Program Flexibility Act provides much needed flexibility to businesses that have taken loans out in the face of unprecedented economic disruption. These changes to terms represent a moving target for businesses seeking to use funds as directed, in many cases increasing complexity. But overall these changes are welcome and ultimately create expanded opportunities for maximizing PPP loan forgiveness.

If you have any questions about PPP loans, forgiveness terms, or related issues, our dedicated team is ready to provide guidance. Please do not hesitate to reach out to us with any questions: contact us.

SPACs: The New Path to Public?

What you need to know about SPACs.

In a year defined by historic economic and social disruption, traditional paths to raising capital have largely shuddered to a halt. Yet many businesses, whether growing or struggling, need capital now more than ever. Filling the role typically held by the initial public offering (IPO) and reverse takeover (RTO) processes, Special Purpose Acquisition Companies (SPACs) have stormed back to prominence on Wall Street by raising capital at a record pace … and then injecting those funds into capital-needy industries and companies. With traditional M&A and IPO opportunities stalled, the return of the so-called “Blank Check Companies” couldn’t be more timely.

Mergers with SPACs have always been an alternative to traditional IPOs. With the IPO market effectively minimized for the time being, SPAC mergers are an increasingly desirable public market liquidity option for private companies.

What the numbers tell us

2020 is a record-shattering year for a revitalized SPAC market. According to data provided by ELLO Capital, there have been 95 SPAC IPOs so far in 2020, raising $37.8 billion (average size: $397 million). That compares with 59 in all of 2019, which raised $13.6 billion (average size: $230 million).

On July 22, 2020, Pershing Square founder Bill Ackman raised $4 billion in the IPO of Pershing Square Tontine Holdings Ltd., the largest SPAC IPO to date. With an initial target of $3 billion, the SPAC included a unique pricing approach: a fixed pool of warrants to be distributed to shareholders who accept a subsequent deal – increasing the take for approvers.

“COVID-19 is likely a direct cause of the acceleration in SPACs this year, as global lockdown policies have restricted travel and the ability to do roadshows. As a result, SPACs have largely replaced traditional IPOs,” said Mark Young, co-founding partner of High Bridge Capital. “Plus, SPACS appeal to the high-growth technology sector, which has led the market recovery post-February correction, and continue to drive grwoth in the work-from-home economy.”

SPACs: Rules of the Road

  • Speed is the name of the game – Leveraging the market expertise of leadership team, a SPAC can raise funds in a matter of days, without the time and resource demands of a roadshow.
  • Minimum value is set – The acquired company/companies must have a minimum value, generally 80% of the fund the SPAC has in escrow following the IPO. Multiple closings, obviously, complicate the otherwise-simple SPAC process and inject completion risk into the transaction.
  • The clock is ticking – There’s a deadline reality for both the SPAC and the target: If the SPAC doesn’t close the deal by the deadline, it must return the funds it raised in its offering. On the flip side, getting near the deadline can help give a target company some leverage.
  • Valuation risk – Investors in SPACs are very much like IPO investors: there is an expectation that they are buying at a discount and there is significant growth potential around the corner. They are not looking for turnaround stories. In turn, SPACs are perceived as focused on growth verticals.
  • Shareholder approval required – The SPAC is a public company that inherits all the baggage – reporting/regulatory demands, liabilities, etc. – of a public company. Approval by target company shareholders likely will be required. And the SPAC would need to file a proxy statement and secure approval from the Securities and Exchange Commission.
  • Redemption risk – Here’s an interesting twist: At the time of the transaction, the SPAC’s public shareholders can redeem their stock. The risk: the SPAC’s cash availability – which might be needed to complete the transaction – could take a hit if the redemptions are significant.
  • Warrants also in play – Sometimes the purchase price includes stock; the value of those shares are impacted by the associated rights. In most cases, the warrants can be exercised at a premium to the original offering price. What can happen: the valuation of stock included in purchase price may rise above, or fall below, the value of the stock issued to a target. The driving factor: can a deal actually get done.
  • Navigate the de-SPAC phase – Definition: the time between the definitive agreement and closing. What needs to be done: communicate details of the transaction to the SPAC’s stakeholders. The goal: optimize the story, educate sales people, engage analysts – protect value.

The Record So Far

• DraftKings (NASDAQ: DKNG): Shares in the online fantasy and gambling company jumped to $18.69 per share when the merger agreement was announced in December, and then edged up to $19.35 per share on the first day of trading, Since then, the price has climbed to about $44.00 per share before settling back into the $37.00-$40.00 area. Its current market capitalization is over $13.5 billion.
• Virgin Galactic (NYSE: SPCE.N): The Richard Branson-backed competitor to Elon Musk’s SpaceX and Jeff Bezos’ Blue Origin, Virgin Galactic shares currently trade in around $17.00-$20.00, about double their late October day-one level, and more than three times their low of $6.90 per share. The stock has reached a high of $42.49 per share, and the company’s current market capitalization is $3.9 billion.
• Nikola (NASDAQ: NKLA): The green truck company has been on a roller-coaster ride since its late June debut. It has climbed as high as $93.99 at one point and currently trades at about $37.00 per share. Market capitalization is just under $14 billion.

Leading the way is a pending deal from Churchill Capital Corp. III, which has agreed to acquire health-cost management services provider MultiPlan for $11 billion. This would make it the largest ever SPAC deal.

“The healthcare and life sciences industries are two sectors likely to continue driving SPAC growth in the COVID-19 era,” said Nadia Tian, co-founding partner of Bridge Point Capital. “This is because healthcare traditionally outperforms the market in a recession, SPACs allow biotech companies to have more cash on hand than a traditional IPO, and the government and consumers are especially focused on these areas as we search for solutions to the COVID-19 outbreak.”

Final Thoughts

Private companies that were planning an IPO or other significant M&A deal before the global economic downturn caused by the COVID-19 pandemic may want to seriously consider a SPAC deal. As with all transactions significant, intensive planning, vetting, due diligence and other considerations must be undertaken.

MGO’s dedicated SEC practice has experience with IPOs, RTOs, M&A deals and the unique characteristics of SPAC acquisitions. To understand your options, and the path ahead, please feel free to reach out to us for a consultation.

Join MGO and Bridge Point Capital for an exclusive webinar that takes a deep dive into SPACs and provides insights on whether this could be the right go-public route for your organization.

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