"Phase 3" McConnell Coronavirus Relief Bill Introduced in the Senate

What: This evening, March 19, Senate Majority Leader Mitch McConnell introduced a bill called the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act. The proposed bill is intended to provide relief to various sectors of the U.S. economy. Of particular interest is the Coronavirus Economic Stabilization Act of 2020, set forth in Division C, Title I of the proposed bill, which provides assistance to severely distressed sectors of the U.S. economy, including (but not limited to) airline carriers.

Who Does This Impact:

• Businesses undergoing stress as a result of COVID-19 that may be looking for Congressional relief and additional funding
• Investors in these businesses that want to see how a federal loan under the proposed CARES Act could impact their current rights and investments

Assistance to Severely Distressed Sectors of US Economy: Economic Stabilization

The Coronavirus Economic Stabilization Act of 2020 (the Act) provides emergency relief through loans and guarantees to “eligible businesses” for losses incurred as a direct result of coronavirus. To accomplish this, the Secretary of the Treasury (the Secretary) is authorized to make or guarantee loans to eligible businesses up to a total of $208 billion and to provide subsidy amounts necessary for such loans and loan guarantees, to be distributed as follows:

• Up to $50 billion for passenger air carriers
• Up to $8 billion for cargo air carriers, and
• Up to $150 billion for other eligible businesses, which include airline carriers or any U.S. business that incurs losses due to the coronavirus that have jeopardized the continued operation of the business

The Secretary is granted broad discretion under the Act, including to enter into agreements to make or guarantee loans if he or she finds that:

• The obligor is an eligible business for which credit is not reasonably available at the time
• The intended obligation is prudently incurred, and 
• The loan is sufficiently secured

The Secretary also has discretion as to the form, terms and conditions, covenants, and requirements of the loans and guarantees, including entering into separate contracts that allow the federal government to share in the gains (if any) of an eligible business or its security holders through warrants, common or preferred stock, or other financial instruments.

The loans must be “sufficiently secured,” but the Act provides no guidance on what the security package would look like and no provisions authorizing the priming of existing creditors. While the Act appears to require that the loans be secured, it also provides that the Secretary shall, to the extent feasible and practicable, make sure that the federal government is compensated for any risk assumed in making the loans. The only restriction on terms is that the Secretary must take into account the current average yield on U.S. marketable obligations of comparable maturity when setting the rate.

The Secretary must publish application procedures and minimum requirements within 10 days of enactment of the Act.

Limitation on Certain Employee Compensation

To receive a loan or guarantee, the eligible business must enter into a binding agreement with the Secretary providing that, for two years beginning March 1, 2020, no officer or employee whose total compensation exceeded $425,000 in 2019 will receive:

• Total compensation in any twelve month period that exceeds his or her 2019 compensation
• Severance pay or other termination benefits that are more than twice the maximum total compensation received by that officer or employee in 2019

This requirement does not apply to employees whose compensation is determined through an existing CBA entered into prior to March 1, 2020.

Continuation of Certain Air Service

The Secretary of Transportation is authorized to require, to the extent reasonable and practicable, that air carriers that receive loans and guarantees maintain scheduled air transportation service as deemed necessary by the Secretary of Transportation to ensure services to any point that the carrier served before March 1, 2020.

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For questions regarding the Coronavirus Economic Stabilization Act of 2020’s impact on businesses that are undergoing stress as a result of COVID-19, please contact any of the members of Kramer Levin’s Bankruptcy and Restructuring Department.