PPP Update
The Senate on Wednesday evening passed by voice vote a House-passed Paycheck Protection Program reform bill, clearing it for President Donald Trump's signature.
Earlier in the afternoon, GOP Sen. Ron Johnson of Wisconsin objected to a prior effort to pass the bill via unanimous consent, blocking approval. But Johnson agreed to let the bill pass after getting a letter entered into the record clarifying the authorization period.
The legislation would give small businesses more time to use emergency loans under the program by extending the eight-week period in which they must use the money to qualify for loan forgiveness to 24 weeks.
The bill would also give small businesses more flexibility by changing the so-called 75/25 rule, which requires recipients of funds under the program to use three-quarters of the money for payroll costs and to limit other costs to no more than 25% in order to be eligible for loan forgiveness. The new ratio would be at least 60% on payroll and no more than 40% on other costs.
Successfully navigating the review and oversight process requires careful advance preparation. Borrowers need to be able to clearly demonstrate the basis for the certifications in their loan applications, particularly the necessity certification.
The new PPP forgiveness application instructions require borrowers to retain all the documentation supporting their eligibility certifications, and make those materials available on request by the SBA.
Lenders will be expected to perform a good faith review of the forgiveness documentation in the first instance, and may ask for supplemental documentation. If an SBA review begins, the SBA will notify the lender, who must in turn notify the borrower and request certain information.
They made several good recommendations, including documenting the necessity of the loan and how the funds were used and why liquidity was not available elsewhere. We encourage you to share this story with your PPP applicants, particularly the larger ones with a higher likelihood of an audit.
Cool Reception for Main Street Lending Program?
Some potential borrowers complain that the "Main Street" lending program — so named because it's aimed at helping midsize companies hit hard by the coronavirus crisis — imposes interest rates that are too high and requires businesses to pay back loans too quickly.
Under the program, expected to be rolled out this week, companies will also face unwelcome curbs on stock buybacks, dividend payments and executive pay. And the sheer length of time it has taken to start the program — two months — has already forced many firms to seek alternatives. That has left industries divided, with manufacturers eager to tap the loans but retailers wanting more, as many businesses face the prospect of extensive layoffs or even bankruptcy.
“The general feeling among our members is too late and not enough,” said David French, senior vice president of government relations at the National Retail Federation.
It's not only the potential borrowers who are feeling uneasy. Another complication may come from reluctant banks, which are tasked with issuing the loans.
Lenders will be able to make money while offloading most of the risk of default to the Fed — which will purchase up to 95 percent of each loan — but they might still be hesitant to extend credit to companies that are in such dire condition that they can’t get financing elsewhere. One bank representative described a “fizzle” at launch instead of a “big bang.”
"The way this is currently structured, we don’t think there's going to be a huge amount of loans underwritten and a lot of money flowing out to the economy,” said Lauren Anderson, senior vice president and associate general counsel at the Bank Policy Institute, which represents the country’s largest lenders.
Reluctance by lenders to offer the loans is a top concern for the National Association of Manufacturers, which says there is a “huge appetite” among its members for the program.
After the experience with PPP, may lenders are skeptical of another Washington initiative. And, this program is far more complicated than PPP, as it involves new credit to struggling companies – effectively, loans for workout credits with a brand-new counter party, a special purpose vehicle administered by the Boston Fed and funded by Treasury. We have seen more enthusiasm from borrowers so far than their lenders.
Credit Update
As defaults and forbearances increase, a key difference between securitized lenders and banks has emerged. Banks, who were given relief from TDR status of modified loans due to the CARES Act, are essentially rubber-stamping short forbearances and deferrals to any borrower who requests one. Securitized lenders are far more stingy. In the hospitality industry, hotel owners are getting modifications from banks, but not from securitized lenders.
The coronavirus shutdown has spared few companies in the travel business, but times are especially tough for hotel owners whose mortgages are owned by Wall Street investors.
When they need relief, these borrowers go to so-called special servicers that negotiate on behalf of bondholders. Hotel owners seeking a break on their monthly payments say they haven’t had much success negotiating with these firms, which have an obligation to recover as much money as possible for investors.
Just 20% of hotel owners whose loans had been packaged and sold to investors have been able to adjust payments in some form during the pandemic, versus 91% of hotel owners who borrowed from banks, according to a survey by the American Hotel and Lodging Association.
When the hotel business took a dive this spring, Vinay Patel asked for a break on his mortgages, including two tied to properties in northern Virginia.
The local bank that extended the mortgage on his Hampton Inn near Dulles International Airport allowed him to pause payments with few questions asked. He has been trying for months to get relief from KeyCorp, the special servicer on the second property, a nearby Aloft hotel. He has sent the hotel’s financials and other information but is still waiting for an answer.
At the end of May, 19% of CMBS loans backed by hotels were 30 or more days delinquent, up from 2.5% a month earlier, according to data from Trepp LLC. The jump was far bigger than for retail and industrial CMBS loans.
Borrowers get CMBS loans due to the non-recourse feature and often attractive long-term fixed rate. But, they lose the flexibility in being able to talk to their lender. Banks though are now beginning the process of seriously looking at their loan portfolios. Eugene Ludwig, CEO of Promontory, argues that banks need to move faster and prepare for write-downs.
Bankers will undoubtedly have to work out many loans to accommodate good clients. Yet because of the recent benign climate, many workout teams have gone on to other things.
This function needs to be brought back to par. There will be tension between those who hold the traditional “your first loss is your best loss” view, and others who want to keep good clients from failing. This team’s skill and circumspection is critical. For community banks, it typically includes the chief executive officer.
Fourth, portfolios should be reviewed with an eye toward conservative but realistic valuations. Cash flows and debt-service capabilities and collateral valuations should be clear and well documented, and assets properly categorized as to performing or nonperforming status.
Be equally realistic in loan classification. Highly leveraged transactions, commercial real estate, mortgage, oil and gas and small-business portfolios are especially vulnerable to classification challenges.
Further, internal stress testing of portfolios including investments should be conservative. Be realistic in forecasting economic conditions, including a potential virus second phase mandating additional government intervention. Current credit portfolio performance may fall outside the pre-COVID credit-risk appetite. Exceptions should be reported to the board to ensure proper governance over aggregate levels and large individual cases.
Lastly, for a number of banks a new management information system will likely be required to track client requests for amendments, waivers and forbearance.
The bank, one of the biggest lenders for new and used car purchases in the U.S., sent letters to hundreds of independent auto dealerships last month telling them that the San Francisco-based company was dropping them as a customer, according to people with knowledge of the situation.
A Wells Fargo spokeswoman confirmed that the bank, which only makes auto loans through car dealerships, will no longer accept loan applications from most independent shops. Independent dealerships typically sell used cars, unlike franchise dealerships that focus on new vehicles from specific manufacturers.
The bank had “an obligation to review our business practices in light of the economic uncertainty presented by COVID-19 and have let the majority of our independent dealer customers know that we will suspend accepting applications from them,” Natalie Brown, the spokeswoman, said in an email.
We’ve seen other banks take these type of steps. For example, many of the largest mortgage lenders have suspended jumbo mortgage originations. Expect these type of re-evaluations to continue as lenders look closer under the hood at problem loans.
Re-Opening Hiccups
As the economy re-opens, the early read is the economy is opening modestly. Texas is a good example as it is now a month into re-opening. While it hasn’t seen a surge in new cases, many people are still proceeding cautiously.
A month into the reopening of one of America’s biggest economic engines, Texas looks a lot like those other Houston watering holes: cautiously coming back from the shutdown. Using a variety of data measuring all kinds of activity—from dining out to how frequently people leave their homes—a picture of the Lone Star State emerges that raises doubts about the pace of the economic recovery. For months, the big question has been how quickly Americans will bounce back. Looking at Texas, the answer is that it’s going to be a while.
Restaurants reopened on May 1 at reduced capacity, and so far only about a third of the state’s sit-down dining has returned, according to OpenTable. In major cities, the rebound is even more muted. Transactions at restaurants, including takeout and delivery, have tripled since late March, but are still down 50% from before the pandemic, according to Shift4, a payments processor.
Meanwhile, malls all over the state are struggling to lure back customers. Hotel transactions, including bookings, have only rebounded 37% since hitting a nadir on March 22, according to Shift4.
Airports are largely empty. At Dallas Fort Worth International, the second largest airport in the country, scheduled daily departures are averaging about 500, roughly half the rate from February, according to tracking website Flightradar24. Offices can reopen, but many haven’t, instead opting to keep their staff working from home.
Arizona was another state that re-opened early, and I witnessed first-hand the re-opening. In Scottsdale, the bars and restaurants were slow the first weekend, but surged to pre-COVID levels Memorial Day Weekend. But, the Fashion Square Mall appeared fairly tepid, as many of the retail drivers (Apple, Nordstrom, etc.) had not yet re-opened and the unfortunate looting last weekend certainly set the retail recovery back. Hotels are so linked to the travel numbers, which are improving but still a fraction of pre-COVID levels. Las Vegas, which is one of the hardest hit areas, finally re-opened last night after a 78 day absence.
Nevada casinos reopened for gaming at 12:01 am. Thursday, ushering in guests eager to try their luck 78 days after resorts were closed because of the COVID-19 pandemic.
Certain amenities, including buffets and shows, remain closed. Not all properties will reopen Thursday, and those that do will follow a new set of health and safety protocols. Guests can expect to see lots of plexiglass, masks and social distancing reminders.
Despite the enthusiasm from the stock market, re-opening of the economy appears to be tepid so far. Even when the economy fully re-opens, there will be a stubborn percentage of Americans that will not fully participate in the economy and will remain in their homes until there is a cure.
Kylie Jenner
According to an investigation by Forbes, Kylie Jenner grossly mispresented her company’s finances in order to falsely represent that she was “the youngest self-made billionaire ever.” Some of the steps she and her representatives took were quite extraordinary in their deception.
But in the deal’s fine print, a less flattering truth emerged. Filings released by publicly traded Coty over the past six months lay bare one of the family’s best-kept secrets: Kylie’s business is significantly smaller, and less profitable, than the family has spent years leading the cosmetics industry and media outlets, including Forbes, to believe.
Of course, white lies, omissions and outright fabrications are to be expected from the family that perfected—then monetized—the concept of “famous for being famous.” But, similar to Donald Trump’s decades-long obsession with his net worth, the unusual lengths to which the Jenners have been willing to go—including inviting Forbes into their mansions and CPA’s offices, and even creating tax returns that were likely forged—reveals just how desperate some of the ultra-rich are to look even richer.
Then there were Kylie’s financials. Revenues over a 12-month period preceding the deal: $177 million, according to the Coty presentation—far lower than the published estimates at the time. More problematic, Coty said that sales were up 40% from 2018, meaning the business only generated about $125 million that year, nowhere near the $360 million the Jenners had led Forbes to believe. Kylie’s skin care line, which launched in May 2019, did $100 million in revenues in its first month and a half, Kylie’s reps told us. The filings show the line was actually “on track” to finish the year with just $25 million in sales.
While on one is shocked that the Jenners played fast and loose with the truth, the lengths they went to stretch the truth were remarkable and could lead to potential legal problems. Kylie will have to make do with being worth a mere $900 million.
