Many businesses that participated in the Paycheck Protection Program (“PPP”) may have inadvertently defaulted on some of their pre-existing credit facilities or outstanding loans. As has become standard within these debt instruments, lending institutions often protect their future income streams with provisions restricting or prohibiting their borrowers from taking on additional debt. Ordinarily, borrowers strictly abide by such terms, seeking a waiver from their lender in the event that additional debt is needed to service their existing debt. However, COVID-19 and in turn, the Paycheck Protection Program, have led many businesses to seek and obtain additional debt without first obtaining consent from their existing lending institutions. As a result, these borrowers can expect their lenders to request that they enter into an agreement offering lender consent, which will likely be subject to many of the below conditions, representations and warranties, and additional agreements. Borrowers should discuss each of the below terms with legal counsel prior to entering into a consent agreement to ensure they will be able to uphold the agreement as an ongoing matter during this unprecedented time. Importantly, borrowers’ failure to enter into these consent agreements, or their failure to uphold the terms and conditions thereof, may result in an event of default or breach of covenant under the pre-existing debt instruments.
Conditions to Consent:
- Compliance with PPP Requirements. Lender’s consent to the additional debt may be conditioned upon borrower’s compliance with the PPP requirements as provided by the SBA. However, the SBA requirements are broad and continue to evolve as the SBA releases interim final rules. As a result, to protect borrower’s non-compliance with future PPP requirements, borrowers should consider adding qualifying language to the consent agreement that expressly limits borrower’s compliance with the PPP requirements existing as of the time borrower enters into the consent agreement. For further updates and explanations on the latest rules regarding PPP compliance, businesses may find additional guidance here.
- Borrower to use all PPP funds in a manner entitling complete forgiveness. Borrowers should be cautious when agreeing to loan forgiveness conditions, as the rules and timelines surrounding such forgiveness continue to evolve. Qualifying the forgiveness with “substantially” forgiven may provide borrowers with a layer of protection.
- Provide communications and reports with PPP Lender or SBA. Lenders may request copies of communications and other reports with the PPP lender or the SBA in an attempt to understand the context under which borrower has applied for and obtained their PPP loan.
- Provide financial reports and projections. Lenders may request borrowers’ financial reporting from time to time in furtherance of their understanding of borrowers’ current financial condition. Consequently, Borrowers should continue to maintain diligent financial records for the benefit of lenders as well as in support of their own case for loan forgiveness.
Representations and Warranties:
- Borrower meets PPP eligibility criteria. This provision addresses lenders’ concerns that borrowers’ may have been ineligible for PPP funds, and as a result, their funds may not be forgiven. Similar to the guidance above, borrowers should consider adding qualifying language to the consent agreement that expressly limits borrower’s compliance with the PPP requirements existing as of the time that borrower entered into its PPP loan.
- No breach of or conflict with existing agreements. This customary provision provides that borrowers’ entering into PPP loan documents will not cause borrowers to be in breach of any existing agreement to which they are bound and will not conflict with any agreements to which they may be a party to.
- No violation of organizational documents. Another customary provision, this term provides that borrowers’ entering into PPP loan documents will not result in a violation of any of borrowers’ organizational documents, which may include operating agreements, partnership agreements, bylaws, etc.
- No government or third-party approvals necessary. This provision provides Lender with assurances that all consents needed in order to enter into the PPP loan as well as the consent agreement have been obtained.
Additional Agreements:
- Lender may impose a PPP reserve. Lenders may want the ability to reserve a reduction of borrower funds or facility limit to account for the potential need of borrowers to service the new additional debt.
- Cross-default. Lenders may maintain the right to call an event of default on the underlying loan or credit facility in the event that borrower fails to comply with the terms of the consent agreement or borrower fails to ensure the loan is forgiven. As suggested above, borrowers may want to limit this forgiveness language to instead ensure that the loan is “substantially” forgiven, as the rules surrounding forgiveness continue to evolve.
- General Release. Lenders may request that all lender parties are released of and from any and all liability. Borrowers should consider limiting this general release to claims and liability existing as of the time the parties enter into the consent agreement, carving out future lender liability.
- Reaffirmation; Certification. Lenders may request that borrower reaffirm all representations and warranties made at the time the underlying loan documents or credit facility were entered into. Borrowers should closely review these previously made representations and warranties to ensure they remain true and complete.
- Reimbursement of Expenses. Lenders may ask that all costs and expenses incurred in connection with the consent agreement, including reasonable attorney’s fees, be paid by borrower.
These consent agreements will continue to evolve as the SBA issues additional guidance regarding PPP loans and forgiveness.
