[Federal Register Volume 59, Number 225 (Wednesday, November 23, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-28845]
[[Page Unknown]]
[Federal Register: November 23, 1994]
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SMALL BUSINESS ADMINISTRATION
13 CFR Part 109
Prepayment of Certain Small Business Investment and Certified
Development Company Debentures
AGENCY: Small Business Administration (SBA).
ACTION: Interim final rule with request for comments.
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SUMMARY: On October 22, 1994, the President signed Public law 103-403,
The Small Business Administration Reauthorization and Amendments Act of
1994. Title V of that Act, ``Relief From Debenture Prepayment
Penalties'', authorizes the Small Business Administration (SBA) to
provide for relief from prepayment penalties currently imposed on
certain issuers of debentures under the Small Business Investment Act
of 1958 (Act). This interim final rule, published in accordance with
Public Law 103-403, implements this new program.
DATES: This rule becomes effective on November 23, 1994. Comments must
be submitted on or before December 23, 1994.
ADDRESSES: Comments should be sent to Allan S. Mandel, Director, Office
of Rural Affairs and Economic Development (ORA&ED), Small business
Administration, 409 Third Street SW., Suite 8300, Washington, DC 20416.
FOR FURTHER INFORMATION CONTACT: Allan S. Mandel, (202) 205-6485.
The Program
SUPPLEMENTARY INFORMATION: Public Law 103-403, enacted October 22,
1994, authorizes SBA to utilize the $30 million appropriated in Pub. L.
103-317 to provide relief from prepayment penalties currently imposed
on the issuers of debentures which have been guaranteed by SBA and
purchased by the Federal Financing Bank, an arm of the Treasury. Under
these regulations, the issuer of a debenture which has been guaranteed
by SBA and purchased by the Federal Financing Bank may, with the
approval of SBA, prepay the debenture and penalty. Such prepayment may
occur at the election of the borrower of a loan made with the proceeds
of a debenture guaranteed under section 503 of the Act, or the issuer
of a small business investment company debenture. A small business
investment company operating under the authority of section 301(d) of
the Act that has issued a debenture that was purchased by and is held
by SBA may, under the same terms and conditions, prepay such debenture
and penalty. It is anticipated that prepayment consistent with these
regulations will result in reduced penalty payments for the issuers of
the debentures and the borrowers of loans funded with their proceeds.
How the Program Will Work
Since 1958, SBA has operated a Small Business Investment Company
(SBIC) program under which it guarantees the debentures of issuing
small business investment companies operating under section 301(c) of
the Act which are limited to investing in small businesses, or small
business investment companies operating under authority of section
301(d) of the Act which are limited to investing in small businesses
owned and controlled by socially or economically disadvantaged
individuals (SBIC's and SSBIC's). Almost all of these debentures have
terms of ten years or less. Prior to 1986, these debentures were
guaranteed by SBA and sold to the Federal Financing Bank. The proceeds
of those sales were remitted to the issuing investment companies which
then invested them in the requisite small businesses. Since 1986, the
Act has authorized debentures issued by both types of investment
companies to be guaranteed by SBA and then pooled and sold to
underwriters. Certificates backed by the pools are sold in the
marketplace at market rates, and the proceeds of those sales are
remitted to the issuing investment companies so that they may be used
for investing in small businesses.
The SBIC issued debentures which will be affected by this program
are those which will mature by April 1996. Debentures maturing
thereafter are ones which have been pooled and sold in the capital
markets and which are not subject to the prepayment provisions
contemplated by the program. SSBIC issued debentures which will be
affected are those which were issued since 1990, and which may be
prepaid through the issuance of another debenture or by the proceeds of
the sale of preferred stock of the issuer which will be sold to SBA.
Subsequently maturing debentures of companies are ones which have been
pooled and sold in the private capital markets, and are not
contemplated by the provisions of the program.
Because of the short remaining terms on the SBIC and SSBIC
debentures which are eligible for the program, it is unlikely that any
SBICs or SSBICs will benefit from the new prepayment provisions.
Rather, it would be less expensive for the issuer directly to prepay
the Federal Financing Bank in the case of SBIC issuers, or SBA in the
case of SSBIC issuers. Nevertheless, all SBICs and SSBICs which are by
definition eligible for the prepayment program, will be given the
opportunity to make this determination themselves.
SBA has operated a Development Company Program which involves the
guaranteeing of Development Company debentures and the sale of those
debentures for over 15 years. Prior to 1986, that program was known as
the 503 program. Thereafter, it became known as the 504 program.
The 503 program, like the current 504 program, provided long-term,
fixed-rate financing to small firms for plant acquisition,
construction, conversion or expansion, purchase of equipment and job
creation. The program differed from the current 504 program chiefly
because under the 503 program Development Company debentures, the
proceeds of which were used to fund individual loans to small
businesses, were sold to the Federal Financing Bank following SBA's
guaranty. Under the 504 program, established by legislation in 1986,
these same debentures are now guaranteed and pooled by SBA and
purchased by private sector underwriters. Certificates backed by the
pooled debentures are sold in the private markets at market interest
rates.
Presently, some 3,500 503 borrowers are carrying loans with average
remaining terms to maturity of 11 years and average interest rates of
10\1/2\ percent. Many borrowers would like to prepay or refinance their
loans but have been precluded from doing so by the prepayment penalty
clauses which were made a condition of their borrowings. Under those
conditions, a 503 loan may be prepaid prior to scheduled maturity by
paying an amount equal to the present value of the remaining payments
of principal and interest on the loan using a discount rate based on
current market yields on Treasury obligations of comparable maturities.
These regulations provide borrowers of 503 loans or issuers of SBIC
or SSBIC debentures the opportunity to prepay their loans or debentures
with a substitute penalty which is set forth in the following schedule
based upon the original term of either the debenture which funded the
503 loan or the SBIC or SSBIC debenture, and which will be applied to
the unpaid principal balance due on the debenture on the date of
prepayment:
1. with respect to a 10-year term loan or debenture, 8.5 percent;
2. with respect to a 15-year term loan or debenture, 9.5 percent;
3. with respect to a 20-year term loan or debenture, 10.5 percent;
4. with respect to a 25-year term loan or debenture, 11.5 percent.
Any shortfall on the difference between the resulting payment and
the original contractual premium on the debenture will be made up by
SBA from funds specifically appropriated by Congress for that purpose.
The terms and conditions under which prepayment may take place are
explained in Sec. 109.2-4 of these regulations, and are explicitly
required by Pub. L. 103-403.
Consistent with Pub. L. 103-403, SBA will use certified mail and
other reasonable means to notify each eligible issuer and borrower of
the prepayment program. Each preliminary notice will specify the range
and dollar amount of repurchase premiums which could be required of
that issuer or borrower in order to participate in the program. In
carrying out this program, SBA will provide a period of 45 days
following the receipt of notice during which the issuer or borrower
must notify the SBA of intent to participate in the program, at the
close of which no more notifications of intent will be accepted by SBA.
SBA shall require anyone who gives notice of intent to participate to
make an earnest money deposit of $1,000 which shall not be refundable
but which shall be credited toward the final repurchase premium.
Compliance With Executive Orders 12612, 12778, and 12866, the
Regulatory Flexibility Act and the Paperwork Reduction Act
For purposes of the Regulatory Flexibility Act, 5 U.S.C. 601 et
seq., SBA certifies that this rule will not have a significant economic
impact on a substantial number of small entities.
SBA certifies that this rule will not constitute a significant
regulatory action for purposes of Executive Order 12866, since the
change is not likely to result in an annual effect on the economy of
$100 million or more.
SBA certifies that this rule will not impose additional reporting
or record keeping requirements which would be subject to the Paperwork
Reduction Act, 44 U.S.C. Ch. 35.
SBA certifies that this rule will not have Federalism implications
warranting the preparation of a Federalism Assessment in accordance
with Executive Order 12612.
SBA certifies that this rule is drafted, to the extent practicable,
in accordance with the standards set forth in Section 2 of Executive
Order 12778.
This rule is being published as an interim final rule because
section 509(f) of Pub. L. 103-403 requires publication of a final rule
within 30 days of enactment of this legislation. SBA will review any
comments submitted in response to this publication before finalizing
the rule. In this regard, SBA certifies that publication of this rule
in accordance with the notice and comment requirements of 5 U.S.C. 553
is unnecessary or impractical because of this requirement.
List of Subjects in 13 CFR Part 109
Investment companies, Loan programs--business, Small businesses.
Accordingly, pursuant to 15 U.S.C. 636(b)(6) and 15 U.S.C. 695, et
seq., SBA adds a new part 109 to title 13 of the Code of Federal
Regulations as follows:
PART 109--PREPAYMENT OF SMALL BUSINESS INVESTMENT COMPANY AND
CERTIFIED DEVELOPMENT COMPANY DEBENTURES
Sec.
109.1 Purpose.
109.2 Requirements.
109.3 No prepayment fees or penalties.
109.4 Refinancing limitations.
109.5 Definitions.
Authority: 15 U.S.C. 636(b)(6); 15 U.S.C. 695 et seq.
Sec. 109.1 Purpose.
Subject to the requirements set forth in Sec. 109.2 below, an
issuer of a debenture which has been purchased by the Federal Financing
Bank and guaranteed by the Small Business Administration (SBA) under
the Small Business Investment Act of 1958 (Act) who has been notified
of the right to make an election under these regulations, may at the
election of the borrower (in the case of a loan made with the proceeds
of a debenture guaranteed under section 503 of the Act or the issuer
(in the case of a small business investment company) within 45 days of
notification, after forwarding to SBA a nonrefundable deposit of
$1,000, and with the approval of the SBA, prepay such debenture in
accordance with the provisions of this part. A small business
investment company operating under the authority of section 301(d) of
the Act that has issued a debenture that was purchased by and is held
by the SBA, may, under the same terms and conditions, prepay such
debenture, and the penalty as provided in this part.
(a) Procedure--(1) In General. In making a prepayment under
Sec. 109.1 above:
(i) The borrower (in the case of a loan made under section 503 of
the Act) or the issuer (in the case of a small business investment
company) shall pay to the Federal Financing Bank an amount that is
equal to the sum of the unpaid principal balance due on the debenture
as of the date of the prepayment (plus accrued interest at the coupon
rate on the debenture) and the amount of the repurchase premium
described in paragraph (a)(2) of this section; and
(ii) The SBA shall pay to the Federal Financing Bank the difference
between the contractual repurchase premium paid by the borrower under
this section and the repurchase premium that the Federal Financing Bank
would otherwise have received on the date of repayment.
(2) Repurchase premium.
(i) In general. For purposes of paragraph (a)(1)(i) of this
section, the repurchase premium is the amount equal to the product of--
(A) The unpaid principal balance due on the debenture on the date
of prepayment; and
(B) The applicable percentage rate, as determined in accordance
with paragraphs (a)(2) (ii) and (iii) of this section.
(ii) Applicable percentage rate. For purposes of paragraph (a)(2)
(i)(B) of this section, the applicable percentage rate means:
(A) With respect to a 10-year term loan or debenture, 8.5 percent;
(B) With respect to a 15-year term loan or debenture, 9.5 percent;
(C) With respect to a 20-year term loan or debenture, 10.5 percent;
(D) With respect to a 25-year term loan or debenture, 11.5 percent.
(iii) Adjustments to applicable percentage rate. The percentage
rates described in paragraph (a)(2)(B) of this section shall be
increased or decreased by the SBA by a factor not to exceed one-third,
if the same factor is applied in each case and if SBA determines that
an adjustment is necessary, based on the number of issuers and/or
borrowers having given notice of their intent to participate, in order
to make the program (including the amounts appropriated for this
purpose under Pub. L. 103-317) result in no substantial net gain or
loss of revenue to the Federal Financing Bank or the SBA. Amounts
collected in excess of the amount necessary to ensure revenue
neutrality shall be refunded to the borrowers.
Sec. 109.2 Requirements.
For purposes of Sec. 109.1 above, the requirements of this section
are that:
(a) The debenture is outstanding and neither the loan that secures
the debenture, if any, nor the debenture is in default on the date on
which the prepayment is made;
(b) State, local, or personal funds, or the proceeds of a
refinancing in accordance with Sec. 109.4 are used to prepay or roll
over the debenture; and
(c) With respect to a debenture issued under section 503 of the
Act, the issuer certifies that the benefits, net of fees and expenses
authorized by these regulations, associated with prepayment of the
debenture are entirely passed through to the borrower.
Sec. 109.3 No prepayment fees or penalties.
No fees or penalties other than those specified in this part may be
imposed on the issuer, the borrower, the SBA, or any fund or account
administered by the SBA as the result of a prepayment under this part.
Sec. 109.4 Refinancing limitations.
(a) In general. The refinancing of a debenture under sections 504
and 505 of the Act, in accordance with Sec. 109.2(b)--
(1) Shall not exceed the amount necessary to prepay existing
debentures, including all costs associated with the refinancing and any
applicable prepayment penalty or repurchase premium; and
(2) Except as provided in paragraphs (b) and (c) of this section
shall be subject to the provisions of sections 504 and 505 of the Act
and the regulations promulgated thereunder, including regulations
governing payment of authorized expenses, commissions, fees, and
discounts to brokers and dealers in trust certificates issued pursuant
to section 505 of the Act.
(b) Job creation. An applicant for refinancing of a loan made
pursuant to section 503 of the Act with the proceeds of the debenture
funded under section 504 of the Act shall not be required to
demonstrate that a requisite number of jobs will be created with the
proceeds of the debenture.
(c) Loan processing fee. To cover the cost of loan packaging,
processing, and other administrative functions, a development company
that provides refinancing under Sec. 109.2(b) above may impose a one-
time loan processing fee, not to exceed 0.5 percent of the principal
amount of the loan.
(d) New debentures. Issuers of debentures under title III of the
Act may issue new debentures in accordance with such title in order to
prepay existing debentures as authorized in this part.
Sec. 109.5 Definitions.
For purposes of this part:
(a) The term issuer means:
(1) The qualified State or local development company that issued a
debenture pursuant to section 503 of the Act which has been purchased
by the Federal Financing Bank; and
(2) A small business investment company licensed pursuant to
section (c) or (d) of section 301 of the Act; or
(b) The term borrower means a small business concern whose loan
secures a debenture issued pursuant to section 503 of the Act.
Dated: November 15, 1994.
Cassandra M. Pulley,
Acting Administrator.
[FR Doc. 94-28845 Filed 11-22-94; 8:45 am]
BILLING CODE 8025-01-M
