Our NP Connects series brings together leaders from a variety of backgrounds to share real-time perspectives on how the coronavirus (COVID-19) pandemic will unfold over the months ahead.
Here are our takeaways from the program:
- The Small Business Administration (SBA) approved the full $350 billion allocated for the Payroll Protection Program (PPP) within the CARES Act as of April 16, 2020. The SBA approved in two weeks the same amount of money, $350 billion, that the SBA has approved over the past 14 years. This is historic.
- While the PPP is not accepting additional loan applications at this point as the initial funds have been exhausted and additional funds are being sought:
- Some people applied for loans, were approved but have not received the loan. If you applied and were approved by both your lender and the SBA but have not received your funding, know that your loan amount was earmarked for you and will be disbursed within ten (10) days of approval.
- Practical advice for those that did not submit loan applications yet: If your loan application was not approved by either your lender or the SBA, keep in contact with your lender and be ready to move forward if and when additional funds are made available. The current sentiment is additional funds will be approved by Congress as the need has only grown since the CARES Act was approved on March 17.
- Many borrowers are questioning what hardship certification in the PPP loan application means. Focus on how the present economic uncertainty has made it necessary to apply for this loan and document it. Practical advice: Convene a board meeting to document economic conditions and have the board certify that the loan is necessary and prudent. Make a truthful, accurate statement and keep records. A good-faith borrower that gets something wrong likely would only have to pay the loan back with interest.
- Once the PPP loan is received, companies have eight weeks to spend the money on approved expenses. You cannot choose when the eight-week period begins. The period commences when your loan is funded.
- With regard to the second source of stimulus approved under the CARES Act, the Main Street Lending Program (MSLP) is targeted for U.S. companies doing business predominantly in the U.S. with less than $2.5 billion in revenue and 10,000 employees. Loans under the MSLP may be made by any U.S.-insured depository institution, bank holding company, or S&L holding company. Lenders may either originate a new MSLP loan or use an MSLP loan to increase the size of existing loans. More details about the program are expected within the coming week.
- Practical advice: Begin calculating your eligibility now using the EBITDA to debt tests set forth. Be first in line to apply. Note that there is no forgiveness provision under the MSLP. MSLP loans increase your debt. You must certify to executive compensation caps, that jobs will not be sent off shore for a period of time, become subject to audits, and that you will not refinance existing debt with this money. Additionally, there are limits on distributions the company can make.
- Looking at the markets and the global economy, the key questions are how quickly can economies return to normal and when will the process commence. It is projected that quarantine restrictions will be lifted in May across parts of Europe and in June for the U.S. Thus, a subdued U-shaped recovery would commence in 3Q2020. At this point corporate earnings are projected to be down 20–30%. The S&P is expected to end at 2750, roughly where it is today. It is then expected that 2021 will be the year of recovery with earnings approaching 2019 levels at the end of 2021. Price to earnings ratios will remain lower as investors require a higher risk premium. Since the effects on lockdown and stimulus are not known yet, volatility in the capital markets will remain for months. Should additional outbreaks occur and economies remain shut longer, then an L-shaped recovery would result and the S&P would close the year lower at 2100.
- There are opportunities in the market as every asset was sold in a rush to the door to raise cash. Both good and troubled companies were heavily sold. Recognizing that the stimulus funds made available by the U.S. government are looking to prevent liquidity problems from becoming solvency issues, corporate bonds of solid companies offer limited downside and equity like capital appreciation opportunities. As of today, short-term, investment-grade credit offers an attractive yield pick up over risk-free Treasuries.
- While the U.S. equity market is fully priced, there are pockets of opportunities because the recent selling was indiscriminate. Two weeks ago people asked what to buy opportunistically and how should they protect their portfolio. Now questions revolve around long-term trends and the legacy of the crisis. The consensus is we will be more indebted, less global, and more digital:
- While runaway inflation is a threat, federal bankers are more concerned with deflation.
- Reliance upon foreign supply chains has revealed vulnerabilities surrounding critical health items and people will travel less for business and leisure because of fear of virus, additional screening tests for fevers, and the threat of being quarantined abroad.
- The digital transformation of our lives accelerated at warp speed—what was a novelty until March is now essential—online ordering, e-commerce, telemedicine, and remote working solutions and the infrastructure to support it are all de rigueur.
- Distressed investors have not stepped into the market yet as people await the bottom to occur. Owners are not quick to take companies through bankruptcy yet as it is difficult to find a DIP lender and asset pricing is uncertain because it’s tough to value inventory and assets now. Thus, there is less activity. Additional liquidity provided by the PPP and MSLP have delayed the need for bankruptcy filing. There will be distressed M&A opportunities to acquire over-leveraged companies in the future and many family offices have cash available.