PPP Update
The legislation -- titled the Paycheck Protection Program Flexibility Act -- was introduced by Republican Rep. Chip Roy of Texas and Democratic Rep. Dean Phillips of Minnesota. It is intended to make loans more accessible under the program by making its terms of use more flexible.
The Senate would need to pass the legislation to implement the changes. Senators failed to move their own set of reforms to the loan program last week but are expected to return to the issue when the chamber is in session next week.
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 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.
The legislation would also allow businesses that receive loan forgiveness under the program to defer payroll taxes.
Main Street Lending Program
The Federal Reserve Bank of Boston today released additional information for potential lenders and borrowers in the Main Street Lending Program, including a form loan participation agreement, lender certifications and covenants, borrower certifications and covenants, updated Frequently Asked Questions, and other legal documents.
We had a chance to review the documents and here are a few notable takeaways. We strongly encourage you to read the Frequently Asked Questions, as it provides a good overview of the program.
- To be clear, these loans are full-recourse loans with no forgiveness
- The program ends on September 30, 2020, so there are only 4 months to get these loans originated
- No “covered individuals” (President, Vice President, Cabinet, Congress, or their families) can own 20% of the business
- The eligible lender must keep their remaining interest (5% or 15%) and may not participate that interest
- Credit must have been a pass credit on 12/31/2019
- No non-profits or P/E firms as borrowers. Portfolio companies of P/E firms could be borrowers, providing the business and its affiliates have 15K employees or fever and less than $5 billion in 2019 revenue.
- Under MSNLF & MSPLF, eligible lenders pay a fee of 1% to the SPV, which may be charged to the borrower and passed to the SPV. For MSELF, the fee is 0.75%.
- Only depository institutions can participate in the program at this time, although they are considering expanding the program to non-banks
- Borrower must certify that it cannot receive “adequate credit accommodations” elsewhere, but it does not need to demonstrate that credit was denied elsewhere
Since these are essentially loans to businesses that are having difficulties, we took note of how the loans will be treated in the event of distress.
Once an Eligible Borrower misses a mandatory and due payment on the Program loan (beyond the applicable grace period), or the Eligible Borrower or Eligible Lender enters into bankruptcy or other insolvency proceedings, the Main Street SPV will have the option to elevate its participation to an assignment to be in privity with the Eligible Borrower. However, the Federal Reserve does not expect the Main Street SPV to use this right as a matter of course. Rather, the Federal Reserve would expect Eligible Lenders to follow market-standard workout processes and to exercise the standard of care set out in the Loan Participation Agreement (i.e., to exercise the same duty of care in approaching such proceedings as it would exercise if it retained a beneficial interest in the entire loan).
The program is expected to be operational in the next few weeks. We are hearing strong interest from Borrowers, and some caution from lenders. The challenge for lenders is they are entering into a participation agreement with a new counter party (an SPV managed by the Federal Reserve of Boston) for credits under current duress.
Hertz Files BK
Last Friday night, Hertz filed for bankruptcy protection in Delaware. Currently 331 in the Fortune 500, the Hertz bankruptcy is the highest-profile bankruptcy yet due to COVID-19. In the press release Friday night, Hertz gave some color on its situation.
Hertz Global Holdings, Inc. (NYSE: HTZ) ("Hertz" or the "Company") today announced it and certain of its U.S. and Canadian subsidiaries have filed voluntary petitions for reorganization under Chapter 11 in the U.S. Bankruptcy Court for the District of Delaware.
The impact of COVID-19 on travel demand was sudden and dramatic, causing an abrupt decline in the Company's revenue and future bookings. Hertz took immediate actions to prioritize the health and safety of employees and customers, eliminate all non-essential spending and preserve liquidity. However, uncertainty remains as to when revenue will return and when the used-car market will fully re-open for sales, which necessitated today's action. The financial reorganization will provide Hertz a path toward a more robust financial structure that best positions the Company for the future as it navigates what could be a prolonged travel and overall global economic recovery.
Hertz's principal international operating regions including Europe, Australia and New Zealand are not included in today's U.S. Chapter 11 proceedings. In addition, Hertz's franchised locations, which are not owned by the Company, also are not included in the Chapter 11 proceedings.
Hertz entered Bankruptcy with $1 billion in cash, so no DIP financing was obtained at this point. Unfortunately, previous private equity owners saddled Hertz with a complex and debt-ridden corporate structure. Most notably, the ABS structure, while it offered Hertz cheap debt, required Hertz to make additional payments as the collateral values declined due to a soft used car market. The Wall Street Journal had a great summary of the prior missteps of Hertz.
Hertz’s undoing, in the end, wasn’t only the pandemic but also its dependence on financial engineering: In April, it faced a roughly $500 million payment to ABS bondholders, a figure that ballooned as used-car values dropped. It had about $1 billion in cash on its books, and its board faced a choice: Preserve cash or pay.
Carl Icahn believed in Hertz right up until the end. And it cost him $2 billion.
Icahn was the largest shareholder in Hertz, which filed for bankruptcy late Friday night. The activist investor took a stake in Hertz (HTZ) in 2014 and held it through early March of this year -- even as the Covid-19 outbreak was starting to cut into travel. Icahn bought an additional 11.4 million shares for $84.8 million dollars between March 10 and March 12.
That final investment increased the size of Icahn's stake by 26%, giving him 39% of Hertz's shares. And it brought the total investment in the company over the last six years to $2.3 billion.
Tuesday he sold that stake for pennies on the dollar, fetching 72 cents a share for a total of $39.8 million.
"I have been an investor and supporter of Hertz since 2014. Unfortunately because of Covid-19 which has caused an extremely rapid and substantial decrease in travel, Hertz has encountered major financial difficulties," he said in a statement filed with the Securities and Exchange Commission announcing the sale. He said he supported Hertz's decision to file for bankruptcy.
For the latest on Hertz’s filing, click here. There are already 238 items in the legal docket as of today. As of their petition, Hertz had total assets of $25.8 billion and total debts of $24.3 billion. The three parties of note are the bondholders, the Company and the secured creditors, largely the ABS holders who effectively own the vehicles and lease them to Hertz.
Has Buffett Lost It?
The Oracle of Omaha has been under attack from many fronts, questioning Berkshire Hathaway’s recent track record. Howard Gold of MarketWatch has been the most vocal.
Last week I wrote that this was the end of the Warren Buffett era as underperformed the S&P 500 over the entire 2009-2020 bear market. Even Buffett himself recommends investors buy the S&P.
Many Buffett fans responded by saying don’t count Buffett out yet because when (not if) the market tanks again, he’ll have more than $130 billion in cash to scoop up bargains. My MarketWatch colleague Mark Hulbert noted that top advisers often come back from losing streaks to post big gains.
So, what have the nearly 90-year-old Buffett and his 96-year-old business partner Charlie Munger done for us lately? Based on Berkshire’s SEC filings, three of Buffett’s biggest recent investments—Kraft, Occidental Petroleum, and airline stocks—have lost at least $7 billion altogether out of an investment of roughly $10 billion in each.
On a conference call with investors Wednesday, Pershing Square revealed it sold its Berkshire Hathaway holdings as it tries to opportunistically invest in markets pummeled by the coronavirus pandemic. Pershing Square sale indicates it believes it can allocate capital faster and at higher returns in today’s volatile markets than Berkshire, which saw its cash balances swell to $130 billion in the first quarter.
The knives came out after Buffett exited the airlines and revealed that Berkshire did not participate in any meaningful buying during the market lows of March. Additionally, the airline stocks he exited have recovered their losses after his bearish call. While no one can dispute the impressive track record of Buffett, it does seem obvious that his market leadership is waning.
