Paycheck Protection Program (PPP) is a loan program established by US federal government in 2020 to help certain businesses and organizations impacted by COVID-19 to retain their workforce on payroll. These loans are low interest bearing and borrowers could apply for loan forgiveness if certain criterions were met.
On the balance sheet, if a PPP Loan is explicitly cited on a private company's financial statement ie. as a Balance Sheet line-item, we classify this loan as 'Other Equity' instead of 'Debt'.
Several ratios that RapidRatings utilizes to generate an FHR includes Debt, Liabilities, and Equity line items. These ratios will be impacted. Primarily, the reclassification will lower the Debt leverage (as measured by Total Debt to Total Assets) of the Rated entity. The impact on overall FHR of this adjustment, will vary from company to company and is result of a Rated Entity's operational and resiliency performance.
Once a loan is forgiven, the amount forgiven is included on the financial statements for the year in which the forgiveness occurs. We take this amount as an investment income. PPP forgiveness income affects mainly the net profitability score, which is one of the four components of core health. The forgiveness income mostly affects the Net Profitability performance score.
The vast majority of loans have been forgiven by the federal government, and the impact on the FHR scores during the years 2020, 2021 and 2022 range from small to significant, depending on the size of the company and the amount of loan received and/or forgiven. The smaller the company and the more loan received or forgiven, the greater the impact on the FHR score.
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