The American Recovery and Reinvestment Act of 2009 (“Recovery Act” and formerly known as the Stimulus Act) will cause several changes to the Small Business Investment Company Program, including changes in (i) the maximum leverage calculation, (ii) the “overline” limits, and (iii) the financings required to be made to smaller enterprises. Until the Small Business Administration (“SBA”) publishes regulations permanently instituting these changes, the Investment Division has implemented the following interim measures.
Under the SBA’s new formula for calculating the maximum amount of available outstanding leverage, the total leverage made available to one SBIC Fund cannot exceed the lesser of $150 million or 300% percent of the SBIC’s Regulatory Capital. For two or more SBIC Funds under common control, the maximum amount of leverage from the SBA may not exceed $225 million. In the case of SBIC Funds licensed after October 1, 2009 that certify that no less than half of their investments will be made in companies based in low-income geographic areas, a single fund may not exceed the lesser of $175 million or 300% of the SBIC’s Regulatory Capital, and two or more funds may not exceed $250 million.
Under the two-part leverage application process, an SBIC must (i) apply for a commitment to reserve a specific amount of leverage for a five-year period and (ii) apply to draw down leverage against the commitment. The SBA will likely approve only leverage requests in excess of two tiers of private capital, if the SBIC Fund has demonstrated a successful, conservative investment strategy and supported its request with a current business plan that reflects continuation of such a strategy.
The Recovery Act will change the overline limit from 20% of an SBIC’s private capital to 10% of the sum of private capital and the “total amount of leverage projected by [the SBIC Fund] in [its] business plan… at the time of the grant of the [SBIC] license.” For most SBIC Funds, this will be equivalent to increasing the overline limit to 30% of private capital. Until regulations are instituted, SBIC Funds should continue to request overline approval for each investment in accordance with current regulations.
An expedited approval process may be available for existing SBIC Funds, if they were licensed with an approved business plan projecting the use of two tiers of leverage, do not have a capital impairment condition or any other unresolved regulatory violations, and the aggregate financings and commitments to the small concern in which the investment is proposed (including the overline request) is below 30% of Regulatory Capital (as adjusted under current regulations).
Under the expedited process, an SBIC Fund should submit (i) the amount of its Regulatory Capital (as adjusted to determine the overline limit), (ii) the name of the small concern to which the proposed financing is to be made, (iii) the total aggregate amount of financings and commitments made to the small concern and any affiliates prior to the proposed financing, (iv) the total amount of additional financings and commitments for the requested transaction, and (v) the SBIC Fund’s current actual Capital Impairment Percentage (“CIP”) and maximum CIP.
Investments in Smaller Enterprises
Under the Recovery Act, all SBIC Funds with leverage commitments issued on or after February 17, 2009 must certify that at least 25% of their future financings will be made to smaller enterprises. “Smaller enterprises” are companies that, together with any affiliates, either (i) have a net worth of no more than $6 million and average after-tax net income of no more than $2 million for the last two fiscal years, or (ii) meet the industry-appropriate size standard set forth in 13 CFR §107.201.
The Private Equity practice at McGuireWoods LLP is dedicated to keeping our clients advised of new legislative and business developments as they occur. If you have any questions regarding these issues, please feel free to contact your primary attorney at McGuireWoods LLP or the authors. You can also visit our Stimulus Package section for more updates on the American Reinvestment and Recovery Act.