[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