PPP Update
AS of last night, total funding stood at $192BB – just $9 billion more than last week. The program will most likely end with money left over. Most lenders have now closed the vast majority of their PPP loans. By next week, the single-minded focus on PPP for the vast majority of banks will finally come to a conclusion and bankers can move on to other business. In another list of Frequently Asked Questions, the SBA provided safe harbor for good-faith certification for firms that received less than $2MM.
When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates,20 received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.
SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.
This removes some of the anxiety borrowers had in applying for the PPP loans. But, audited any of these larger PPP loans is a tall order, as the certification is so vague. The borrower merely attests that “current economic uncertainty makes this loan request necessary to support the ongoing operations of Borrower.” The key word is “necessary,” which is defined by the law dictionary as the following:
As used in jurisprudence, the word “necessary” does not always Import an absolute physical necessity, so strong that one thing, to which another may be termed “necessary,” cannot exist without that other. It frequently imports no more than that one thing is convenient or useful or essential to another. To employ the means necessary to an end is generally understood as employing any means calculated to produce the end, and not as being confined to those single means without which the end would be entirely unattainable. McCulloch v. Maryland, 4 Wheat 316, 413, 4 L. Ed. 579.
We asked attorney Mark Belongia, shareholder at Johnson & Bell and he added:
Given the current state of affairs, most small businesses are likely have little to no access to additional credit and thus should not be overly concerned with meeting this test. On the other hand, larger privately held or public companies should do a serious review of their access to credit in deciding to not to return the loan funds or face the consequences of an SBA audit yielding a negative outcome.
But just hours before a May 14 deadline to return PPP loans with amnesty, most public companies made no mention of giving back the funds, which become grants if used for approved expenses like payroll. Of the $1.32 billion tapped by public companies across 407 loans, only 61 loans making up a combined $411 million are being returned, according to data analytics firm FactSquared.
While we concur that no public company should have received funds under this program, it was Congress that dramatically expanded the scope of SBA’s lending authority, and one can’t blame public companies from accepting grants, unless the shaming costs more than the grant. Meanwhile, the SBA inspector general had critical words for its own agency.
We found that SBA’s Interim Final Rules for implementing the PPP and SBA’s FAQs mostly aligned with the Act. We identified the following areas, however, that did not fully align with the Act’s provisions:
- Prioritizing Underserved and Rural Markets
- Loan Proceeds Eligible for Forgiveness
- Guidance on Loan Deferments
- Registration of Loans
The big takeaway impacting the most borrowers is the requirement that 75% of the funding be used for payroll costs in order to receive full loan forgiveness, even though Congress made no such mention of this requirement. Nevertheless, this program was a dramatic increase in the SBA’s authority in a very short period, and we are not surprised that there were many issues with the program.
Deferrals Soar
Unfortunately, small businesses loans and lines appear to be getting hurt the most. 32% of B of A’s balances are on a payment deferrals, which are generally 90 days with accrued interest added to the principal balance at the end of the deferral. Of their five categories, consumer vehicle lending stood at 3%, HELOCs at 6%, Mortgage at 7%, and consumer and small business card at 5%, all on a percentage of balances.
West: deferrals and cases as a % of the population were relatively low, with the exception of PPBI (18%) and COLB (14%)
Midwest: deferrals were moderate despite cases as a % of population above the national average in IL and MI.
Northeast: generally higher confirmed case count and level of deferrals versus the national average of 0.39% of the population. Deferrals were notably lower at STL (5%), PNC (4%) and CFG (3%).
Southeast: deferrals were relatively high, despite relatively low confirmed cases in most of these states. Four of the top 5 deferrals as a percentage of Loans were in this region SFNC (22%), SSB (21%), SASR (21%) and SBCF (19%).
South Central: deferrals and cases were both low to moderate despite the hit to oil prices with the exception of IBOC (18%).
Due to the differences in transparency, one shouldn’t read too much into one bank with a high percentage of deferrals versus another. Some banks may have simply been slower to provide the relief requested by the borrower. We hope all banks will provide a high level of transparency on their deferrals, as a certain percentage of these loans will become problem loans.
State of Air Travel
The impact on air travel from the coronavirus will be felt for many years to come, according to the International Air Transport Association, which estimates that passenger traffic won’t rebound to pre-crisis levels until at least 2023.
The trade association for the world’s airlines said that demand for air travel had dropped more than 90% in Europe and the U.S. since the start of the pandemic, and warned that recovery will be even slower if lockdowns and travel restrictions are extended.
But any hopes for a boost to the industry with some resumed travel will be dashed if governments institute mandatory 14-day quarantine periods for travelers upon arrival, de Juniac warned.
“We are advocating with governments not to implement quarantine measures that will retain people for two weeks that will arrive anywhere,” he said.
“We think that it is useless provided we have implemented the health and sanitary controls that we are discussing with governments. It is absolutely key for the tourist industry which is so important for so many countries in Europe.”
With so much of the economy impacted by air travel, getting passengers to fly again safely is so critical to the recovery. Mandatory 14-day quarantines, which were recently proposed by UK Prime Minister Boris Johnson, are so counterproductive when there are other options, such as requiring testing before international flights. The TSA checkpoint travel numbers are a great indicator of domestic travel. Yesterday, 176,667 passengers traveled versus 2,343,675 on the same day last year. However, it does represent twice the number of passengers of the low, which occurred on April 14 of this year.
On Working from Home
States of Play, a joint CNBC/Change Research survey of swing states, finds 42% of respondents nationwide saying they are working from home – a huge jump from only 9% who say they worked completely from home before the pandemic. Some 14% say they are working from home more than before, while 19% are working from home for the first time.
A 58% majority report they are still working outside the home.
Once the economy reopens, 24% say they’d like to work either entirely or more from home compared to how they worked before, while 55% plan to head back to the office and 20% are not sure.
It appears clear that many workers do enjoy working from home. The unanswered question is whether they are more productive. This is a massive experiment on working from home and it does not bode well for office buildings, whether they are in downtowns or in suburban office parks. The New York Times noted that many commercial tenants in New York City will need less space.
Before the coronavirus crisis, three of New York City’s largest commercial tenants — Barclays, JP Morgan Chase and Morgan Stanley — had tens of thousands of workers in towers across Manhattan. Now, as the city wrestles with when and how to reopen, executives at all three firms have decided that it is highly unlikely that all their workers will ever return to those buildings.
The research firm Nielsen has arrived at a similar conclusion. Even after the crisis has passed, its 3,000 workers in the city will no longer need to be in the office full-time and can instead work from home most of the week.
Manhattan has the largest business district in the country, and its office towers have long been a symbol of the city’s global dominance. With hundreds of thousands of office workers, the commercial tenants have given rise to a vast ecosystem, from public transit to restaurants to shops. They have also funneled huge amounts of taxes into state and city coffers.
But now, as the pandemic eases its grip, companies are considering not just how to safely bring back employees, but whether all of them need to come back at all. They were forced by the crisis to figure out how to function productively with workers operating from home — and realized unexpectedly that it was not all bad.
If that’s the case, they are now wondering whether it’s worth continuing to spend as much money on Manhattan’s exorbitant commercial rents. They are also mindful that public health considerations might make the packed workplaces of the recent past less viable.
On the other hand, if workers do use office space, companies will likely abandon awful open office plans that everyone seems to hate. We think its too early to draw conclusions, but even a modest shift of workers from Class-A office buildings in major downtowns to their homes has broad implications for office real estate.
