CARES Act Economic Stabilization Update

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) involves the injection of $2 trillion into the U.S. economy in an attempt to provide relief to various sectors of the U.S. economy. Of that amount, more than $500 billion will be directed to states, municipalities, and larger industries, including airlines.

Whom Does This Impact?

• Businesses, states, or municipalities in financial distress as a result of COVID-19 that may be looking for Congressional relief and additional funding
• Investors in these businesses, states, and municipalities that want to see how a federal loan under the proposed bill could impact their current rights and investments

Amount and Uses:

$500 Billion Stimulus Package

Title IV of the CARES Act, called the Coronavirus Economic Stabilization Act of 2020, allocates $500 billion to make loans, loan guarantees, and other investments to businesses, states, and municipalities, including:

• $25 billion to passenger air carriers and certain related companies, including ticket agents and FAA-certified companies that perform inspection, repair, replacement or overhaul services
• $4 billion for air cargo carriers
• $17 billion for businesses critical to maintaining national security
• $454 billion (and any excess from the above allocations) to be used for programs and facilities established by the Federal Reserve, for businesses that have not otherwise received adequate relief in loans or loan guarantees under the CARES Act and for states and municipalities, through purchasing issuers’ obligations directly or through the secondary market or making loans or advances

Washington, D.C., Puerto Rico, and other U.S. territories and their respective municipalities are all eligible for assistance under the Coronavirus Economic Stabilization Act.

The authority granted under the Coronavirus Economic Stabilization Act expires on Dec. 31, 2020. Loans, loan guarantees and other investments then outstanding can be restructured but not forgiven.

Additional Loans and Grants

The CARES Act separately provides $32 billion to cover payroll costs for commercial airlines, air carriers, and related contractors.

The CARES Act also provides the following grants and direct payments:

• $10 billion in grants for commercial airports to prevent, prepare for and respond to the coronavirus
• $25 billion in transit infrastructure grants to protect health and safety while ensuring transportation access remains available
• $1.018 billion in grants to Amtrak to prevent, prepare for and respond to the coronavirus
• $150 billion in direct payments for states and territories to cover budget shortfalls for coronavirus-related expenditures

For Air Carriers and Related Companies and Security-Critical Companies:

The Secretary of the Treasury (the Secretary) oversees loans to air carriers and related companies, air cargo carriers, and security-critical businesses, including determining which companies are eligible and creating procedures for application and minimum requirements.

The Secretary has broad discretion over the form of the loan and the terms, covenants, and requirements – within certain parameters, including a 5-year limitation on maturity and an interest rate that must be based on the yield of outstanding U.S. marketable obligations of comparable maturity. The Act also requires the U.S. to receive a warrant or equity interest in any company that has issued securities that are traded on a national securities exchange and a warrant or equity interest or senior debt instrument for any other company. The Secretary can accept senior debt instruments from companies with nationally traded securities if it determines that the company cannot feasibly issue warrants or other equity interests. The Secretary can sell or exercise warrants or debt instruments but cannot exercise voting power for common stock.

Unlike the version of the bill introduced by Senate Majority Leader Mitch McConnell on March 19, the Act does not require that loans or loan guarantees from Treasury be secured. If there is no security, the loan or loan guaranty must be at a rate that reflects the loan’s risk and is, to the extent practicable, not less than the rate for comparable obligations prior to the outbreak of the coronavirus.

The Act establishes the following restrictions:

• Stock buybacks: Companies that receive loans and their affiliates are subject to a ban on purchasing equity securities listed on a national exchange of the company or a parent company through the life of the loan, plus one year, except to the extent required by preexisting contracts.
• Dividends: Companies that receive loans cannot pay dividends or other capital distributions on common stock for the life of the loan, plus one year.
• Executive bonuses: For companies that receive loans, officers and employees who received more than $425,000 in compensation in 2019 cannot receive more than their 2019 compensation during any 12-consecutive-month period and cannot receive severance pay of more than twice their 2019 compensation. Officers and employees who received more than $3 million in 2019 cannot receive more than $3 million plus 50% of their excess compensation over $3 million.
• Other: Companies must maintain at least 90% of their employment levels as of March 24, must be created or organized in the United States or under the laws of the United States, and must have significant operations and a majority of employees in the United States. To be eligible, companies must have incurred direct or indirect losses due to the coronavirus that jeopardize their continued operations.

The CARES Act separately requires the Secretary to provide $25 billion to passenger air carriers, $4 billion to cargo air carriers, and $3 billion to certain airline contractors to continue payment of employee wages, salaries and benefits. The financial assistance is based on the amount of past salaries and benefits for the period April 1, 2019, through September 30, 2019, and can take whatever form the Secretary determines, including warrants, options, preferred stock, debt or notes. In exchange, air carriers and contractors must agree to refrain from conducting involuntary furloughs and reducing rates and benefits until Sept. 30, 2020, and to abide by substantially the same restrictions on executive compensation and on stock buybacks and dividends on common stock through Sept. 30, 2021, among other restrictions.

The Act also suspends certain aviation excise taxes and allows the Secretary to require airlines to continue scheduled air service, to the extent reasonable and practicable.

For All Other Businesses, States and Municipalities:

The Secretary also oversees the distribution of the remaining $454 billion to all other businesses, states and municipalities, but these distributions must go through Federal Reserve programs or facilities. While the Secretary has broad discretion over the form of the loan and the terms, covenants and requirements, applicable requirements under section 13(3) of the Federal Reserve Act related to collateralization, taxpayer protection and borrower solvency still apply.

The Act establishes the following restrictions:

• Stock buyback: Substantially similar to those required for air carriers, related companies and security-critical companies
• Executive bonuses: Substantially similar to those required for air carriers, related companies and security-critical companies
• Other: Companies must be created or organized in the United States or under the laws of the United States and have significant operations and a majority of employees in the U.S.

These restrictions apply only to businesses that receive direct loans and do not apply to other forms of aid, including secondary purchases, syndicated loans, and securities or capital markets transactions. The Secretary can waive these restrictions if necessary but can be required to testify before the House and Senate on why the waiver was granted.

Midsize Business Loans: The Act asks the Secretary to seek implementation of a program or facility that provides financing to banks and other lenders that make direct loans to businesses (and nonprofits) with between 500 and 10,000 employees at rates of no more than 2% per year, with no principal or interest due within at least the first six months.

An eligible business must make certain good-faith certifications, including (but not limited to):

• It is not in bankruptcy.
• It will retain at least 90% of its workforce at full compensation and benefits until Sept. 30 and intends to restore at least 90% of its Feb. 1, 2020 workforce and all compensation and benefits to workers no later than four months after the COVID-19 health emergency ends.
• It will not pay dividends or buy back stock while the loan is outstanding.
• It is a U.S. business domiciled in the U.S. with signification operations in the U.S. and will not outsource or offshore jobs for the life of the loan, plus two years.
• It will not abrogate existing collective bargaining agreements for the life of the loan, plus two years, and will remain neutral in any union organizing effort for the life of the loan.

States, Territories and Municipalities: The Act asks the Secretary to seek implementation of a program or facility that provides liquidity to the financial system that supports lending to states, territories and municipalities.

Conflict of Interest:

The CARES Act blocks any of the $500 billion from going to businesses in which the President, the Vice President, the head of an executive department, any member of congress, and their spouses, children or sons- or daughters-in-law hold more than 20% of any class of equity interest, including shares, interests in LLCs or LPs, and warrants or rights to purchase, sell or subscribe such shares or interests.

Oversight:

The Act creates the following oversight mechanisms:

• Special Inspector General: Appointed by the President, with the advice and consent of the Senate, to conduct, supervise, and coordinate audits and investigations regarding loans, loan guarantees, and other instruments made by the Secretary and the Secretary’s management of any programs established under the CARES Act.
• Oversight Board: Five-member board to oversee the implementation of Coronavirus Economic Stabilization Act by Treasury and the Federal Reserve, appointed as follows:
  • one member by the Speaker of the House
  • one member by the minority leader of the House
  • one member by the majority leader of the Senate
  • one member by the minority leader of the Senate
  • one chairperson chosen by the Speaker of the House and majority leader of the Senate, after consulting with the applicable minority leaders.

Additional State and Local Government Funding:

Title VI of the CARES Act, called the Coronavirus Relief Fund, separately allocates $150 billion of direct payments from Treasury to states, local governments and tribal governments, to be overseen by the Inspector General of the Department of the Treasury.

Each of the 50 states will receive its pro rata share based on population of $139 billion total and at least $1.25 billion each. Up to 45% of a state’s share can go directly to local governments based on their pro rata share of total state population. The Act also allocates pro rata distribution of $3 billion to Washington, D.C., Puerto Rico, and other territories based on their populations, and $8 billion to tribal governments.

Distributions under this section can only be used to cover costs (i) of necessary expenditures incurred due to the COVID-19 health emergency, (ii) that were not accounted for in the most recently approved state or local budget, and (iii) that were incurred between March 1 and Dec. 30, 2020.

Additional Transportation Funding:

The CARES Act also provides the following grants:

Airports: $10 billion for grants to sponsors of airports to prevent, prepare for and respond to the coronavirus. Of this $10 billion, $3.7 billion of this amount will be allocated among commercial service airports based on each sponsor’s pro rata share of all 2018 enplanements at commercial service airports, and $3.7 billion will be allocated among commercial service airports based on an equal combination of (i) the sponsor’s pro rata share of all 2018 debt service for commercial service airports and (ii) the sponsor’s ratio of unrestricted reserves to debt service. The grants are subject to certain continued employment requirements.

Transit Infrastructure: $25 billion for transit infrastructure grants. The funds can be used for operating expenses related to the coronavirus response, reimbursement of operating costs to maintain service and lost revenue, and paying administrative leave.

Amtrak: $492 million for operation of the Northeast Corridor and $526 million for the rest of the national network, although the amounts can be transferred or merged. At least $239 million of the national grant is an offset in the form of assistance for states in meeting their obligations to Amtrak.