Prepayment of Certain Small Business Investment and Certified Development Company Debentures

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