As the novel coronavirus continues to wreak havoc around the world, our Coronavirus Response Team persists in analyzing the more than 800 pages comprising the Coronavirus Aid, Relief and Economic Security (CARES) Act – legislation that makes the 2009 Stimulus Bill and 2008 Wall Street Bailout Package look like child’s play. The CARES Act is the largest stimulus package in United States history, providing for $2 trillion dollars in relief, a massive increase over the 2009 and 2008 stimulus packages, which provided for relief in the amounts of $831 billion and $700 billion, respectively.
The CARES Act appropriates approximately $500 billion to Title IV, known as the “Economic Stabilization and Assistance to Severely Distressed Sectors of the United States Economy Act” (Title IV). Moreover, in a win for aviation and national defense, about $46 billion has been allocated to specific industries: $25 billion to passenger air carriers, $4 billion to cargo air carriers; and $17 billion to businesses critical to maintaining national security. The remaining $454 billion is allocated more generally to “programs or facilities established by the Board of Governors of the Federal Reserve System for the purpose of providing liquidity to the financial system that supports lending to eligible businesses, states and municipalities.”
This post offers a cursory summary of certain portions of Title IV (those addressed to the aviation and national security industries), including how these funds can be utilized and who may be eligible to receive them.
Which Businesses are Generally “Eligible”?
Under Title IV, an “eligible business” is broadly defined as “an air carrier” or “any “United States business that has not otherwise received adequate economic relief in the form of loans or loan guarantees provided under” the CARES Act. However, the fine print narrows the scope of eligibility significantly, as is well explained by, among others, the U.S. Senate Committee on Banking, Housing and Urban Affairs.
Those businesses for which credit is “reasonably available” may not be entitled to funding. To a similar point, the business must intend that the obligation be “prudently incurred.” Additionally, Title IV provides that a loan guarantee must be sufficiently secured (or that the loan must bear a rate of interest reflecting higher risk), and must be for a time “as short as is practicable,” and for no more than 5 years.
Perhaps most importantly, the business must, as a result of the COVID-19 pandemic, “have incurred or [be] expected to incur covered losses such that its continued operations are jeopardized.” Accordingly, businesses that are still operating but have yet to see the effects of the COVID-19 pandemic, may still be entitled to receive funds if a downturn in business is anticipated.
Where a company receives relief under Title IV, neither it nor any of its affiliates will be able to repurchase stock until 12 months after the loan is no longer outstanding, unless the obligation to purchase stock so arises from a prior contractual obligation. Further, the eligible business may not pay dividends on common stock until 12 months after the loan is no longer outstanding.
Compensation and Operations Requirements
To receive Title IV funding, there are also certain requirements with respect to location of employees and maintaining employment levels. First, the eligible business must certify that it was created or organized in the United States or under United States law, and that it has significant operations in and a majority of its employees based in the United States.
The eligible business must maintain its employment levels as of March 24, 2020 at full compensation and benefits until September 30, 2020, if practicable. If it is not practicable to maintain the workforce at 100%, the business can reduce its employment levels up to 10%.
However, that is not all. With respect to employees or officers who make more than $425,000 in total compensation (including salary, bonuses, awards of stock, and other financial benefits), the eligible business must agree that, during the period beginning on the date on which the agreement is executed and ending one (1) year after the date the loan or loan guarantee is no longer outstanding, no employee or officer will receive total compensation for a 12 consecutive month period exceeding the total compensation received in 2019, or will receive severance pay or other benefits upon termination of employment in excess of two times the maximum total compensation received by said employee or officer in 2019.
As for employees or officers who earn more than $3 million in total compensation, the eligible business must agree that, during the period beginning on the date on which the agreement is executed and ending one (1) year after the date the loan or loan guarantee is no longer outstanding, no officer or employee will receive total compensation during any consecutive 12 month period in excess of $3 million plus 50% of the excess over $3 million of the total compensation received by said employee or officer in 2019.
Compensation to the Government
The government requires businesses receive relief under Title IV to provide something of value in exchange. A public company must provide “a warrant or equity interest” in the A private company must provide “a warrant or equity interest in the eligible business” or “a senior debt instrument issued by the eligible business.”
All warrants, equity interests, and senior debt instruments must provide for a reasonable participation by the government, for the benefit of the taxpayers, in equity appreciation in the case of warrants and equity interests or a reasonable interest rate premium in the case of senior debt instruments. The government must also be able to sell, exercise, or surrender a warrant or any senior debt instrument for the primary benefit of taxpayers; although the Secretary is not permitted to exercise voting power with respect to any share of common stock acquired.
Clearly, the CARES Act provides support to various entities in an attempt to keep individuals employed and businesses from failing. Stay tuned for a follow-up post about the remainder $454 billion allocated to loans, loan guarantees, and other investments in programs and facilities established by the Board of Governors of the Federal Reserve System for the purpose of providing liquidity to the financial system that supports lending to eligible businesses, States or municipalities.
If you have any questions about the contents of this post, the contents of CARES Act, or need assistance, contact any member of our Coronavirus Response Team.