U.S. Business Relief During COVID-19 (Part II): SBIC Debentures for Small Businesses

March 19, 2020

McGuireWoods is monitoring the evolving availability of government-sponsored emergency loan programs for U.S. businesses suffering losses from the COVID-19 pandemic. Potential sources include federal programs available from the U.S. Small Business Administration (SBA) under the Small Business Act of 1958; programs under the Small Business Investment Act passed by Congress in 1958 and the regulations promulgated thereunder (the SBIC Act); and through the Trump administration’s plans announced March 18, 2020, to establish a new $300 billion small-business interruption loan program that would provide a 100 percent guarantee on any qualifying loan as part of a proposed $1 trillion stimulus bill to be introduced in the U.S. Senate.

This alert provides current information regarding long-term capital available to certain small businesses under the SBIC program created pursuant to the SBIC Act.

Eligible small business investment companies (SBICs) are privately owned and managed and are solely responsible for their investment decisions.

The SBA currently provides leverage to SBICs through debentures. SBIC debentures are unsecured loans issued by the SBIC that have interest only payable semi-annually and a 10-year maturity. In spite of current difficulties in the credit markets, including dislocation of the commercial paper market, on March 16, 2020, the SBIC Funding Corporation completed pooling of $1,007,335,000 of SBA debentures with a coupon rate of 2.078 Percent. (See recent McGuireWoods alert “SBIC Program Remains Steady; Debenture Rate Decreases to 2.078 Percent.”)

SBICs may invest only in what the SBA defines as “small” business concerns, generally defined as a company with a tangible net worth of less than approximately $19.5 million and average after-tax profits in the prior two years of less than approximately $6.5 million. There is an alternative test based on industry-specific thresholds expressed in terms of revenues and number of employees, which may allow investments that do not meet the smaller business tests. There are also restrictions on the ability of an SBIC to invest in certain categories of small businesses such as farmland, project financing, relenders or re-investors, passive businesses, real estate businesses, businesses contrary to the public interest, or other financial intermediaries.

McGuireWoods and its attorneys have been closing deals and opening doors as active members of the Small Business Investor Alliance and its predecessor organization, NASBIC, for more than 20 years. “The SBIC program is more critical than ever to the lifeblood of our small business economy. The SBIC program enables billions of dollars of private investment into shoring up and growing the small businesses that are the economic engine of America. It is vital that small businesses have access to the capital they need to preserve American jobs,” said SBIA President Brett Palmer on March 16, 2020.

For additional information on resources available to businesses in this crisis, see McGuireWoods’ related alert “U.S. Business Relief During COVID-19 (Part I): Low-Interest Economic Injury Disaster Loans.” If you have any questions or need help assessing whether your business qualifies as an SBIC, please contact one of the authors. For answers to other questions related to the pandemic, please contact any of the McGuireWoods COVID-19 Response Team members.