Economic Stabilization and Assistance

On Friday, March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which includes provisions to address the economic stabilization of certain distressed sectors of the United States economy. The face of the CARES Act does not provide all the relevant information and detail sufficient to determine with certainty how it will be applied; the Secretary of the Treasury (Secretary) is authorized to publish procedures for applications for relief and other minimum requirements and guidelines within 10 days after the enactment of the bill. Below are key takeaways involving the availability of $500B of loans authorized by the CARES Act and the terms and conditions of such loans. The below will be supplemented once additional guidance is available.

Loans Available

The Secretary is authorized to make loans, loan guarantees, and other investments in support of eligible businesses (i.e., air carriers or U.S. businesses that have not otherwise received adequate economic relief under the CARES Act), states, and municipalities related to losses incurred as a result of COVID-19 in an amount not to exceed $500B, as follows:

• up to $25B shall be made available for passenger air carriers and other similar businesses that are approved to provide inspection, repair, or overhaul services
• up to $4B shall be made available for cargo air carriers
• up to $17B shall be made available for businesses critical to maintaining national security
• up to $454B shall be made available for programs or facilities established by the Federal Reserve System for providing liquidity to the financial system that supports lending by (a) purchasing obligations or other interests directly from issuers, (b) purchasing obligations or other interests in secondary markets or otherwise, or (c) making loans.

Terms and Conditions

The Secretary will make loans, loan guarantees, or other investments on the terms and conditions (including with respect to rates) determined by the Secretary based on the risk and the current average yield on outstanding marketable obligations of the United States of comparable maturity.

Terms for Carriers and Businesses Critical to Maintaining National Security

The Secretary may enter into agreements to make loans or loan guarantees to eligible businesses if:

1. the Secretary determines that credit is not reasonably available to such business at the time of the transaction;
2. the Secretary determines that the intended obligation by the applicant is prudently incurred;
3. the loan is sufficiently secured or is made at a rate that reflects the risk and pre-COVID-19 market conditions;
4. the duration of the loan is as short as practicable and, in any event, not longer than five years;
5. the agreement provides that, until one year after the loan is no longer outstanding, neither the business nor any affiliate may purchase publicly traded equity securities of such business or its parent company, except to the extent required under a contractual obligation in effect prior to the enactment of the CARES Act;
6. the agreement provides that, until one year after the loan is no longer outstanding, the business shall not pay dividends or make other capital distributions with respect to its common stock;
7. the agreement provides that, until September 30, 2020, the business shall maintain its employment levels as of March 24, 2020, to the extent practicable, and in any case shall not reduce its employment levels by more than 10% from the levels on such date;
8. the agreement includes a certification by the business that it is organized in the United States and has significant operations in and a majority of its employees based in the United States; and
9. the business must have incurred or is expected to incur losses as a result of COVID-19 such that the continued operations of the business are jeopardized.

Terms for Direct Loans by the Secretary

The Secretary may make a loan, loan guarantee, or other investment under programs or facilities established by the Federal Reserve that provide direct loans upon the following terms and conditions:

1. the applicable business must agree that, until one year after the loan is no longer outstanding, it will not repurchase any of its or its parent company’s publicly traded equity securities, except to the extent required under a contractual obligation in effect prior to the enactment of the CARES Act;
2. the applicable business must agree that, until one year after the loan is no longer outstanding, it will not pay dividends or make other capital distributions with respect to its common stock; and
3. the eligible business must be organized in the United States and have significant operations in and a majority of its employees based in the United States.

Terms for Loans for Mid-Sized Businesses

The Secretary is required to implement a program or facility that provides financing to banks and lenders that make loans to eligible businesses, including, to the extent practicable, nonprofit organizations with between 500 and 10,000 employees, with such direct loans being subject to an annualized interest rate no higher than 2% per annum, and with no principal or interest due for at least the first six months.  Additionally, any eligible borrower under this program must certify that:

1. the uncertainty of economic conditions makes the loan request necessary to support ongoing operations;
2. the funds it receives will be used to retain at least 90% of the recipient’s workforce at full compensation and benefits until September 30, 2020;
3. the recipient intends to restore not less than 90% of its workforce that existed as of February 1, 2020, and to restore all compensation and benefits to workers no later than four months after the termination of the public health emergency in response to COVID-19;
4. the recipient is domiciled in the United States with significant operations and employees in the United States;
5. the recipient is not a debtor in a bankruptcy proceeding;
6. the recipient will not pay dividends with respect to its common stock, or repurchase its or its parent company’s publicly traded equity securities, while the direct loan is outstanding, except as required under prior contractual obligations;
7. the recipient will not outsource or offshore jobs for the term of the loan and two years after completing repayment of the loan;
8. the recipient will not abrogate existing collective bargaining agreements for the term of the loan and two years after completing repayment of the loan; and
9. the recipient will remain neutral in any union organizing effort for the term of the loan.

Additionally, the CARES Act grants the Board of Governors of the Federal Reserve System the authority to establish a Main Street Lending Program or other similar program or facility (including any program in which the Secretary makes a loan, loan guarantee, or other investment) that supports lending to small and mid-sized businesses on terms and conditions as the Board may set consistent with the relevant provisions of the Federal Reserve Act.

Limitation of Employee Compensation

The CARES Act limits the amount of compensation for highly compensated officers and employees for companies receiving assistance. The Secretary may only enter into an agreement with an eligible business if the agreement provides that, during the period from the date of execution and ending one year after the date on which the loan is no longer outstanding:

• no officer or employee whose compensation exceeds $425K in 2019 will receive (a) compensation which exceeds, during any 12 consecutive months of such period, the total compensation received in 2019 or (b) severance or other termination benefits which exceeds twice the maximum total compensation received in 2019; and
• no officer or employee whose compensation exceeds $3M in 2019 may receive, during any 12 consecutive months of such period, total compensation in excess of (a) $3M and (b) 50% of the excess over $3M of the total compensation received in 2019.

Financial Protection of Government and Securities Issued to the Government

Under the CARES Act, in exchange for loans by the Secretary, certain eligible businesses will be required to issue to the Secretary a warrant, equity interest, or a senior debt instrument of such eligible business. 

Additional Provisions for Air Carriers

• The Secretary of Transportation is authorized to require air carriers receiving loans to maintain scheduled air transportation service as deemed necessary to ensure services to any point served by that carrier before March 1, 2020. Such authority will terminate on March 1, 2022.
• Certain aviation taxes are suspended under the CARES Act until January 1, 2021.
• The Secretary shall provide financial assistance to air carriers in an amount equal to the salaries and benefits reported to the Department of Transportation for the period from April 1, 2019 through September 30, 2019 (or as set forth in sworn financial statements).
• To be eligible for financial assistance, the air carrier or contractor shall:
  • refrain from conducting involuntary furloughs or reducing pay rates and benefits until September 30, 2020;
  • through September 30, 2021, ensure that neither the business nor an affiliate thereof may purchase any publicly traded equity security of such business or its parent company;
  • through September 30, 2021, ensure that such business does not pay dividends or make other capital distributions; and
  • fulfill the requirements set forth in the CARES Act with respect to the protection of collective bargaining agreements and limits on certain employee compensation.

View all of our COVID-19 perspectives here. Contact a member of our COVID-19 Legal Task Force here.