Congress Passes CARES Act: Overview of the Relief Available to Small and Other Business Concerns see more
NAFA member, Greenberg Traurig, LLP, shares the latest update on the CARES Act Interim Final Rule.
On April 2, 2020, the Department of Treasury and the Small Business Administration (SBA) posted the Interim Final Rule implementing Sections 1102 and 1106 of the CARES Act in advance of its publication in the Federal Register. On April 3, 2020, SBA also released an overhauled Paycheck Protection Program loan application form.
The new Interim Final Rule and SBA Form 2483 reflect significant developments since the promulgation of the CARES Act and our prior guidance. Updates based on these developments are included below in red text for ease of reference.
In the midst of a global pandemic and the highest unemployment rates the United States has seen since 1933, President Trump signed into law the $2 trillion Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), providing economic relief to businesses, States and municipalities, and individuals affected by COVID-19. While the scope of the CARES Act is wide-ranging, this alert is limited to providing a high-level overview of the relief available for qualifying business concerns (generally small businesses with certain limited exceptions). We will publish additional alerts as the SBA issues implementing regulations over the next 15 days.
Which businesses will be eligible for relief under the CARES Act?
Under Title I of the CARES Act (“Keeping American Workers Employed and Paid”), qualifying businesses that have suffered significant disruption as a result of COVID-19 will be able to receive no-fee “small business interruption loans.” Qualifying small businesses include “any business concern, nonprofit organization, veteran’s organization, religious organizations or Tribal business” that have:
- 500 employees or fewer, whether employed on a full-time, part-time, or other basis; or
- meet the SBA’s industry-based “size standard” requirements for the applicable North American Industry Classification System (NAICS) code, which are based either on number of employees or annual receipts, if larger than 500 employees, in which the concern operates.
The Interim Final Rule clarifies that only concerns that “either had employees for whom you paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC,” are eligible for PPP loans, and that “no eligible borrower may receive more than one PPP loan.”
SBA Form 2483 indicates that applicants will not be eligible to receive loans if the Applicants or their owners: are presently or are proposed for suspension or debarment, presently involved in any bankruptcy, delinquent or in default on any direct or guaranteed loan by a Federal agency, or subject to formal criminal charges or probation; or that have within the past 5 years been convicted of any felony or placed on parole or probation.
What are the exceptions to the “500 employees” rule? How do the SBA’s affiliation rules come into play?
The updated SBA Form 2483 requires applicants to certify that the “Applicant is eligible to receive a loan under the rules in effect at the time this application is submitted that have been issued by the [SBA] implementing the Paycheck Protection Program.” The Interim Final Rule states that “SBA intends to promptly issue additional guidance with regard to the applicability of affiliation rules at 13 CFR §§ 121.103 and 121.301 to the PPP loans.”
To determine an applicant’s receipts or number of employees, each applicant can generally expect that it must aggregate all employees on an affiliate basis, including subsidiaries and, in the context of private equity-backed and venture capital-backed businesses, portfolio companies. Exceptions are made in the legislation for:
- independently owned franchises, who are approved by the SBA, and hospitality businesses that fall within NAICS code 72, “Accommodation and Food Services,” and each of location with 500 or fewer employees; and
- any business receiving financial assistance from a Small Business Investment Company (“SBIC”).
What about independent contractor or gig economy workers?
Yes, sole proprietors, independent contractors, gig economy workers, and self-employed individuals are all eligible for the Paycheck Protection Program.
The Interim Final Rule clarifies “independent contractors” do not count as employees “for purposes of a borrower’s PPP loan calculation,” or “PPP loan forgiveness,” because “independent contractors have the ability to apply for a PPP loan.”
Who will provide and administer the loans?
Loans will be administered pursuant to SBA’s section 7(a) loan program, as modified by the CARES Act. Loans will be made and serviced by existing banks and lenders enrolled in the SBA 7(a) program, as well as any other lenders determined by the SBA “to have the necessary qualifications to process, close, disburse and service loans made with the guarantee of the Administration.”
What is the maximum loan size?
The CARES Act sets the maximum loan amount under the Paycheck Protection Program as 250 percent of average monthly payroll costs, up to a total of $10 million. The amount is intended to cover eight weeks of payroll expenses and any additional amounts for making payments towards debt obligations. This eight-week period may be applied to any time frame between February 15, 2020 and June 30, 2020. Seasonal business expenses will be measured using a 12-week period beginning February 15, 2019, or March 1, 2019, whichever the seasonal employer chooses.
The Interim Final Rule clarifies that the maximum loan amount should be calculated based on the applicant’s “[a]ggregate payroll costs . . . from the last twelve months for employees whose principal place of residence is the United States,” less “any compensation paid to an employee in excess of an annual salary of $100,000.”
The Interim Final Rule further clarifies that the “outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020, less the amount of any ‘advance’ under an EIDL COVID 19 loan,” may be included in the maximum loan amount for PPP loans.
The terms of the loan may differ on a case-by-case basis. However, the maximum terms of the loan can be up to ten years with an interest rate capped at 4% per annum and there shall be no prepayment penalties. The SBA will also reimburse lenders for origination or underwriting fees in an amount of: (i) 5% for loans of not more than $350,000, (ii) 3% for loans of more than $350,000 and less than $2 million and (iii) 1% for loans equal to or greater than $2 million. The SBA will issue additional regulations and guidance with respect to other terms and conditions of the program.
The Interim Final rule clarifies that the interest rate “will be 100 basis points or one percent,” and that the “maturity is two years,” for PPP loans. The Interim Final Rule further clarifies that “there will be no up-front guarantee fee payable to the SBA by the Borrower,” and that “Agent fees will be paid by the lender out of the fees the lender receives from SBA.”
Any other restrictions on loan terms?
Yes, the CARES Act limits the use of Paycheck Protection Program loans to: (1) payroll costs, excluding the prorated portion of any compensation above $100,000 per year for any person; (2) costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums; (3) employee salaries, commissions, or similar compensations; (4) payments of interest on any mortgage obligation that existed on February 15, 2020 (which shall not include any prepayment of or payment of principal on a mortgage obligation); (5) rent payments (including rent under a lease agreement); (6) interest on any other debt obligations that were incurred before February 15, 2020; and (7) utility payments, including electricity, gas, water, transportation, and phone and Internet access for service incurred in the ordinary course of business prior to February 15, 2020, in each case, paid during the eight-week period commencing on the date of origination of the loan.
The Interim Final Rule clarifies that “Payroll costs” shall not include “Federal employment taxes imposed or withheld,” “including the employee’s and employer’s share of FICA (Federal Insurance Contribution Act) and Railroad Retirement Act taxes,” “income taxes required to be withheld from employees,” and “qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act.”
In addition, the Interim Final Rule further clarifies that if a borrower uses “PPP funds for unauthorized purposes, SBA will direct [the borrower] to repay those amounts,” and that borrowers that “knowingly” misuse the funds “will be subject to additional liability such as charges of fraud.”
Will interest payments be deferred for any period?
Yes, loan payments (including principal, interest and fees) will be deferred for at least six months and up to one year starting at the origination of the loan.
The Interim Final Rule clarifies the deferment period will be for 6 months “following the date of the disbursement of the loan,” and that while borrowers will not have to make any interest payments during the deferment period, “interest will continue to accrue on PPP loans during this six-month deferment.”
What portion of the loans will be eligible for forgiveness?
The loan will be eligible for forgiveness to the extent that the loan proceeds have been used for the following costs incurred and payments made during the eight-week period after the loan is made: (1) payroll costs, excluding the prorated portion of any compensation above $100,000 per year for any person; (2) group healthcare benefits and insurance premiums; (3) mortgage interest (but not on any prepayment of or payment of principal on a covered mortgage obligation); (4) rent payments and leases in existence prior to February 15, 2020, and; (5) certain utility payments, including electricity, gas, water, transportation, and phone and Internet access for service incurred in the ordinary course of business prior to February 15, 2020, in each case, paid during the eight-week period commencing on the date of origination of the loan. The Paycheck Protection Program can be used for other business-related expenses, like inventory, but that portion will not be forgiven.
The Interim Final Rule clarifies that the amount of loan forgiveness can be up to the full principal amount of the loan and any accrued interest, and that “not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs.”
The Interim Final Rule states that “SBA will issue additional guidance on loan forgiveness.”
A borrower will be required to submit a detailed application in support of loan forgiveness directly to the lender (see chart here). The lender will make a determination on the application within 60 days of receipt of the application; the loan is forgiven at the end of the 8-week period after the borrower takes the loan. Borrowers will work with lenders to verify covered expenses and the proper amount of forgiveness. The SBA will reimburse the lender directly for the principal amount of any forgiven debt, plus interest accrued through the date of repayment. SBA will issue additional implementation guidance and regulations regarding the loan forgiveness process within 30 days after enactment of the CARES Act.
Forgiven amounts will not constitute cancellation of indebtedness income for federal tax purposes.
The Interim Final Rule clarifies that a “lender does not need to conduct any verification if the borrower submits documentation supporting its request for loan forgiveness and attests that it has accurately verified the payments for eligible costs. The Administrator will hold harmless any lender that relies on such borrower documents and attestation from a borrower.”
What portions of the loan will not be eligible for forgiveness?
The purpose of the Paycheck Protection Program is to help businesses retain employees, at their current base pay. If all employees are retained at their current salary, the entirety of the loan will be forgiven. If employees are laid off, the forgiveness will be reduced by the percent decrease in the number of employees. If the borrower reduces the salary or wages of an employee no more than $100,000 per year by more than 25%, loan forgiveness will be reduced by the same amount. If borrowers make staff or covered salary reductions between February 15, 2020 and April 26, 2020, the loan can still be forgiven for the full amount of payroll costs if those reductions are eliminated by June 30, 2020.
Is the borrower responsible for interest on the forgiven loan amount?
No, if the full principal of the Paycheck Protection Program loan is forgiven, the borrower is not responsible for the interest accrued in the 8-week covered period. The remainder of the loan that is not forgiven will operate according to the loan terms agreed upon by the borrower and the lender.
What can the loans be used for? Are there any restrictions?
Payroll, rent, mortgage payments, utilities, sick leave, insurance benefits and healthcare premiums are among the permitted uses. Proceeds of loans may also be used to make interest payments on other debt obligations that were incurred prior to February 15, 2020. However, loan proceeds may not be used to make any payment or prepayment of principal of existing debt obligations (e.g., mortgages).
SBA Form 2483 requires applicants to certify that PPP loan “funds will be used to retain workers, maintain payroll or make mortgage interest payments, lease payments, and utility payments, as specified under the Paycheck Protection Program Rule.”
Will these loans be secured? Where would these loans rank in security and priority as compared to any pre-existing third-party debt instruments?
No, the loans will be unsecured and will not take precedence over existing debt instruments in terms of payment priority. The loans will also not require collateral or personal guarantees from owners of borrowers. There will be no recourse to owners or borrowers for nonpayment, except to the extent proceeds are used for an unauthorized purpose. The SBA has also waived prepayment penalties and has waived the guaranty fee and annual fee applicable to other 7(a) loans.
What is the deadline to apply to the program?
June 30, 2020.
The Interim Final Rule clarifies that the PPP loans will be available on a “first-come, first-served” basis through June 30, 2020, or “until funds made available for this purpose are exhausted.”
Will these loans trade on the secondary market?
In addition, the Interim Final Rule clarifies that a “PPP loan may be sold on the secondary market after the loan is fully disbursed,” and that a “lender may request that the SBA purchase the expected forgiveness amount of a PPP loan or pool of PPP loans at the end of week seven of the covered period.”
Are the small business interruption loans the same as the small business “disaster” loans I have read about?
No, the “disaster” loans are relief in addition to the small business interruption loans. Under existing authority, the SBA will also provide smaller “Economic Injury Disaster Loans” (EIDLs) in an amount up to $2 million to businesses with not more than 500 employees, and agricultural cooperatives, that meet the SBA’s industry-specific business size limitations in declared disaster areas (a growing list of states) and have suffered substantial economic damage as a result of COVID-19 for the period of January 31, 2020 to December 31, 2020. Most private non-profit organizations, of any size, will also be eligible EIDL Loans.
Can I get a Paycheck Protection Act loan if I received an EIDL Loan?
Yes, if an EIDL loan was obtained related to COVID-19 between January 31, 2020 and the date at which the Paycheck Protection Program becomes available, borrowers will be able to refinance the EIDL into the Paycheck Protection Program for loan forgiveness purposes. However, borrowers may not take out an EIDL and a Paycheck Protection Program for the same purposes. Remaining portions of the EIDL, for purposes other than those laid out in loan forgiveness terms for a Paycheck Protection Program loan, would remain a loan. If a borrower took advantage of an emergency EIDL grant award of up to $10,000, that amount would be subtracted from the amount forgiven under Paycheck Protection Program.
The Interim Final Rule clarifies that borrowers that “received an SBA EIDL loan made between January 31, 2020 and April 3, 2020,” may “apply for a PPP loan.” If the EIDL loan was not used for payroll costs, the EIDL loan will not effect the borrower’s eligibility for a PPP loan. However, if the borrower’s EIDL loan was used for payroll costs, the borrower’s “PPP loan must be used to refinance [the] EIDL loan.”
Did the Care Act relax other EIDL Program Requirements?
Yes, the CARES Act also: (1) waives any requirement for a personal guarantee for loans that are less than $200,000; (2) replaces the requirement that eligible businesses be in business for the 1-year period before the disaster with a requirement that businesses must have been in operation on January 31, 2020, and; (3) waives requirement that applicants are unable to obtain credit elsewhere.
The Interim Final Rule clarifies that no collateral or personal guarantees by borrowers are required for PPP loans.
What about advances?
The CARES Act also allows businesses, that self-certify as eligible, to apply for an EIDL advance/ grant, in an amount up to $10,000, to be provided within 3 days after receipt of the application. Advances can be applied to any allowable purpose under the section 7(b) program, including: (1) providing paid sick leave to employees unable to work due to the direct effect of COVID–19; (2) maintaining payroll to retain employees during business disruptions or substantial slowdowns; (3) meeting increased costs to obtain materials unavailable from the applicant’s original source due to interrupted supply chains; (4) making rent or mortgage payments, and; (5) repaying obligations that cannot be met due to revenue losses. If an applicant that receives an advance is subsequently denied an EIDL loan, the advance does not need to be repaid. If an applicant receives an advance under the EIDL program and “transfers into, or is approved for, the loan program under” the 7(a) program, “the advance amount shall be reduced from the loan forgiveness amount for a loan for payroll costs made under such section 7(a). The CARES Act designates $10 billion for these immediate EIDL grants.
What about tax credits?
Certain employers will be eligible for a payroll tax credit in each applicable quarter in an amount equal to 50% of the first $10,000 of qualified wages paid to employees (including health benefits) between March 13, 2020 and December 31, 2020. However, this credit is not available to employers who participate in the Paycheck Protection Program. This credit will be available to employers whose business (i) was fully or partially suspended due to a government shutdown order or (ii) experienced a decline of gross receipts of at least 50% vs. the same calendar quarter in the prior year (until such time as gross receipts for a quarter are greater than 80% vs. the same calendar quarter in the prior year). For businesses with greater than 100 full-time employees, the tax credit is only available to the extent wages are paid to employees who are unable to work as a result of a government shutdown order. For businesses with fewer than 100 full-time employees, the tax credit is available for all employees, even if the employee works from home during the business closure. This relief is set forth in Title II (Section 2301) rather than Title I of the CARES Act. Because this 50% tax credit FOR wages paid is not available to employers who participate in the Paycheck Protection Program, an employer would need to choose between taking this credit or obtaining a loan under the Paycheck Protection Program.
Where can I apply for the Paycheck Protection Program?
Businesses can apply for the Paycheck Protection Program at any lending institution that is approved to participate in the program through the existing SBA 7(a) lending program and additional lenders approved by the Department of Treasury. There are thousands of banks that already participate in the SBA’s lending programs, including numerous community banks. You do not have to visit any government institution to apply for the program. You can call your bank or find SBA-approved lenders in your area through SBA’s online Lender Match tool.
The Interim Final Rule clarifies that (i) “[a]ny federally insured depository institution or any federally insured credit union,” (ii) certain “Farm Credit System institution[s],” and (iii) certain “depository or non-depository financing” providers meeting specifically enumerated requirements “will be automatically qualified” to issue PPP loans unless currently designated as in Troubled Condition or subject to a formal enforcement action by their primary federal regulator.
For more information and updates on the developing situation, visit GT’s Health Emergency Preparedness Task Force: Coronavirus Disease 2019.
*Special thanks to Steven M. Felsenstein, Barbara A. Jones, Peter Lieberman, Michael J. Schaengold, Scott Schipma, Brittany E. Allison, Brett Castellat, Danielle K. Muenzfeld, and Caroline E. Thee‡ for their assistance with this Alert.
‡Admitted in Indiana. Not admitted in Illinois.
 Small business size standards vary by industry and are generally based on the number of employees or the amount of annual receipts the business has. Small business size regulations can be found in Title 13 Part 121 of the Electronic Code of Federal Regulations (eCFR).
This article was originally published by Greenberg Traurig, LLP, on April 3, 2020.
- 500 employees or fewer, whether employed on a full-time, part-time, or other basis; or
Treasury Establishes COVID-19 Emergency Payroll Support to Air Carriers and Contractors see more
NAFA member, Greenberg Traurig, LLP, shares the latest information on the U.S. Department of the Treasury's COVID-19 Emergency Payroll Support to Air Carriers and Contractors.
On March 30, 2020, the U.S. Department of the Treasury (Treasury) issued guidance on assistance to the air carrier industry as contemplated by the emergency relief provisions of Section 4112 of the Coronavirus Aid, Relief, and Economic Security Act (Cares Act). The guidance provides guidelines and application procedures for payroll support to air carriers and contractors.
Under Section 4112(a) of the CARES Act, Treasury is authorized to provide payments to passenger air carriers, cargo air carriers, and certain contractors up to the following aggregate amounts:
- Passenger air carriers: $25 billion
- Cargo air carriers: $4 billion
- Contractors: $3 billion.
Who is an air carrier?
- an individual who is a citizen of the United States;
- a partnership, each of whose partners is an individual who is a citizen of the United States; or
- a corporation or association organized under the laws of the United States or a state, the District of Columbia, or a territory or possession of the United States, of which the president and at least two-thirds of the board of directors and other managing officers are citizens of the United States, which is under the actual control of citizens of the United States, and in which at least 75% of the voting interest is owned or controlled by persons that are citizens of the United States, in each case undertaking by any means, directly or indirectly, to provide foreign air transportation, interstate air transportation, or the transportation of mail by aircraft.
Who is a cargo air carrier? An air carrier that, during the time period from April 1, 2019, to September 30, 2019, derived more than 50% of its air transportation revenue from the transportation of property or mail, or both.
Who is a contractor?
- a person that performs, under contract with a passenger air carrier conducting operations under 14 C.F.R. Part 121:
- catering functions, or
- functions on the property of an airport that are directly related to the air transportation of persons, property, or mail, including but not limited to the loading and unloading of property on aircraft; assistance to passengers under 14 C.F.R. Part 382; security; airport ticketing and check-in functions; ground-handling of aircraft; or aircraft cleaning and sanitization functions and waste removal; or
- a subcontractor that performs the above functions.
What are catering functions? The preparation, assembly, or both, of food, beverage, provisions, and related supplies for delivery, and the delivery of such items, directly to aircraft or to a location on or near airport property for subsequent delivery to aircraft.
Who is an employee? An individual, other than a corporate officer, who is employed by an air carrier or a contractor in the United States (including its territories and possessions).
Who is a passenger air carrier? An air carrier that, during the period from April 1, 2019, to September 30, 2019, derived more than 50% of its air transportation revenue from the transportation of passengers.
What are wages, salaries, benefits, and other compensation? For purposes of Section 4113(a)(2) and (3) of the CARES Act, remuneration paid by the applicant to its employees for personal services and includes salaries, wages, overtime pay, cost-of-living differentials, and other similar compensation, as distinguished from per diem allowances or reimbursement for expenses incurred by personnel for the benefit of the applicant.
To be eligible to receive payments under the payroll support program, an applicant must agree to:
- use such payments exclusively for the continuation of employee wages, salaries, and benefits;
- refrain from conducting involuntary layoffs or furloughs, or reducing pay rates and benefits, of employees of the applicant and its subsidiaries (or, in the discretion of the Secretary of the Treasury, any affiliated entity) until September 30, 2020;
- through September 30, 2021, ensure that neither the applicant nor any subsidiary or affiliate thereof purchases, in any transaction, an equity security of the applicant or the direct or indirect parent company of the applicant that is listed on a national securities exchange; and
- through September 30, 2021, ensure that the applicant shall not pay dividends, or make other capital distributions, with respect to the common stock (or equivalent interest) of the applicant or any subsidiary thereof.
The amount that may be awarded to an approved applicant is an amount equal to the compensation paid by the applicant to its employees, as determined by the Secretary of Treasury in his sole discretion, for the period April 1, 2019, through September 30, 2019 (Awardable Amount).
The Awardable Amount is determined in one of three ways:
- For an air carrier that reports salaries and benefits to the Department of Transportation pursuant to 14 C.F.R. Part 241, the Awardable Amount is an amount equal to the salaries and benefits reported by such air carrier on such reports pertaining to the time period.
- For an air carrier that does not transmit reports under 14 C.F.R. Part 241, the Awardable Amount is an amount that such carrier certifies, using sworn financial statements or other appropriate data, as the amount of wages, salaries, benefits, and other compensation paid by such carrier during the time period.
- For a contractor, the Awardable Amount is an amount that such contractor certifies, using sworn financial statements or other appropriate data, as the amount of wages, salaries, benefits, and other compensation that such contractor paid its employees during the time period.
In the event that Awardable Amounts payable to approved applicants in any category (passenger air carriers, cargo air carriers, or contractors) exceed the aggregate amount authorized to be provided to such category, Treasury may reduce, on a pro rata basis, the amounts payable to approved applicants in such category in order to address such shortfall.
Additional restrictions on applicants include undertakings with respect to other items specified in the CARES Act, including:
- collective bargaining agreements;
- limitations on certain employee compensation;
- the issuance of financial instruments to Treasury to compensate it for the award of funds;
- audit and reporting requirements;
- prohibitions on suspension or debarment;
- limitations or prohibitions on insolvent or nearly insolvent applicants;
- disclosure of information to the Department of Transportation; and
- continuation of certain air service.
How to Apply
An applicant must complete the Payroll Support Application Form, including a proposal identifying a financial instrument (or instruments) and proposed terms for such instruments that would provide appropriate compensation to the federal government in exchange for payroll support. If the applicant is not an air carrier that reports salaries and benefits to the U.S. Department of Transportation under 14 C.F.R. Part 241, the applicant must also include a sworn financial statement certifying the amount of compensation paid to its employees during the period from April 1, 2019, through September 30, 2019. Treasury may request appropriate documentation in support of the sworn financial statement at a later time.
An applicant must also complete a Payroll Support Agreement, which will be provided by Treasury after an application is received. The Payroll Support Agreement will include terms containing:
- the assurances described above;
- the compensation limitations in Section 4116 of the CARES Act;
- certain other conditions and covenants; and
- provisions for the clawback of payments upon the applicant’s failure to satisfy its assurances, conditions, or agreements.
To receive approval of their applications as soon as possible, applicants should submit their completed application materials not later than 5:00 p.m. EDT on April 3, 2020. Applicants may submit their application materials to PayrollSupportApplications@treasury.gov. In the coming days, Treasury will provide a web-based form for application submissions. Applications received after 5:00 p.m. EDT on April 3 will be considered, but may not receive approval as quickly. Applications received after 11:59 p.m. EDT on April 27, 2020, may not be considered, but the Secretary of the Treasury may, in his discretion and subject to the availability of funds, consider such applications for approval.
The application form, as well as additional guidance on the program, is available on Treasury’s website.
For more information and updates on the developing COVID-19 situation, visit GT’s Health Emergency Preparedness Task Force: Coronavirus Disease 2019.
This article was originally published by Greenberg Traurig, LLP on April 1, 2020.
COVID-19 Federal Legislative and Regulatory Economic Stabilization Programs – What Your Business Needs to KnowCOVID-19 Federal Legislative and Regulatory Economic Stabilization Programs - What You Need to Know see more
NAFA member, Greenberg Traurig, LLP, shares what your business needs to know about the COVID-19 Federal Legislative and Regulatory Economic Stabilization Programs.
As the Coronavirus Disease 2019 (COVID-19) pandemic continues in the United States, the U.S. Congress and the U.S. federal financial regulatory agencies – the Federal Reserve, U.S. Department of the Treasury, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, National Credit Union Administration, and the Consumer Financial Protection Bureau (collectively, the Financial Agencies) – have introduced a number of financial stimulus programs or provided guidance designed to stabilize the U.S. economy and provide relief to U.S. debtors, both corporate and individual.
Each of the stimulus programs is outlined below.
Title IV of the CARES Act
On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Title IV of the CARES Act titled, “Economic Stabilization and Assistance to Severely Distressed Sectors of the United States Economy,” includes several financial stimulus programs for U.S. businesses, other than programs earmarked by Title I of the CARES Act for small businesses.Some of the key financial stimulus programs of the CARES Act include: U.S. Department of the Treasury Direct Support (Including Legislative Authority to Establish Facilities)
The CARES Act authorizes the U.S. Department of the Treasury (Treasury) to make up to $500 billion of emergency loans, loan guarantees, or investments to be allocated as follows:
- Up to $25 billion in loans and guarantees will be allocated for passenger air carriers;
- Up to $4 billion in loans and guarantees will be allocated for cargo air carriers;
- Up to $17 billion in loans and guarantees will be allocated for businesses critical to maintaining national security (the foregoing, Specific Industry Assistance); and
- Up to $454 billion for loans, loan guarantees, and investments will be allocated to facilities established by the Federal Reserve to support lending to eligible businesses, states, and municipalities ((b)(4) Assistance).
Midsized Business Lending Program
The CARES Act authorizes Treasury to endeavor to implement a program or facility of (b)(4) Assistance to provide funds to banks and other lenders to make direct loans to non-profit organizations and businesses between 500 and 10,000 employees. Loan interest cannot exceed 2% per year and no principal or interest payments will be due for the first six months (or such longer period as determined by Treasury). To qualify, the eligible borrower must self-certify in good faith to Treasury, among other things, that:
- the loan is necessary to support the borrower’s ongoing operations because of the uncertainty of the economic conditions as of the date of the loan application;
- the borrower will retain at least 90% of its workforce at full compensation and benefits until September 30, 2020;
- the borrower intends to restore (x) at least 90% of the workforce of the borrower as it existed as of February 1, 2020 and (y) all compensation and benefits to the workers of the borrower no later than four months after the termination of the public health emergency declared by the U.S. Secretary of Health and Human Services;
- the borrower is domiciled in the United States with “significant operations and employees” in the United States;
- the borrower is not a debtor in bankruptcy proceedings;
- the recipient is created or organized in the United States or under the laws of the United States and has significant operations in, and a majority of its employees are located in, the United States;
- the borrower will not pay dividends with respect to its business or repurchase an equity security listed on a national securities exchange of itself or its parent company unless required by existing contractual arrangements;
- the borrower will not outsource or offshore jobs for a period of time ending two years after repayment of the loan;
- the recipient will not abrogate existing collective bargaining agreements during the term of the loan and for two years thereafter; and
- the borrower will remain neutral in any union-organizing effort.
Main Street Lending Program
The CARES Act does not limit the discretion of the Federal Reserve to establish a “Main Street Lending Program” or other similar program or facility that supports lending to small- and mid-sized businesses on terms consistent with the authority given to the Federal Reserve by Section 13(3) of the Federal Reserve Act.
State and Municipal Borrower Lending Program
The CARES Act directs Treasury to endeavor to implement a program or facility that provides liquidity to the financial system by lending to states and municipalities.
Conditions on Specific Industry Assistance Programs
The Act directs Treasury to publish procedures for applications and minimum requirements for Specific Industry Assistance not more than 10 days after the date of enactment of the CARES Act (i.e., by April 6, 2020). Loans and guarantees under this program are conditioned on Treasury determining that:
- the borrower is an eligible business for which credit is not otherwise reasonably available at the time of the transaction;
- the intended obligation by the borrower is prudently incurred;
- the loan or guarantee is sufficiently secured or made at a rate that reflects the risk of the loan or guarantee and, to the extent practicable, is not less than the interest rate based on market conditions for comparable obligations prior to the COVID-19 outbreak;
- the duration of the loan or guarantee is as short as practicable and not longer than five years;
- neither the borrower nor its affiliates may purchase an equity security that is listed on a national securities exchange of the borrower or its parent, except pursuant to existing contractual obligations for 12 months after the loan or guarantee is no longer outstanding;
- the borrower cannot pay dividends or make other capital distributions on its common stock for 12 months after the loan or guarantee is no longer outstanding;
- the borrower must maintain its employment levels as of March 24, 2020, to the extent practicable, and in any case cannot reduce its employment levels by more than 10% from the levels on such date;
- the borrower must certify that it is created or organized in the United States or under the laws of the United States and has significant operations in, and a majority of employees based in, the United States;
- the borrower must have incurred or is expected to incur covered losses, as defined in the CARES Act, such that the continued operations of the business are jeopardized, as determined by Treasury;
- the borrower must comply with the limitations on certain employee compensation set forth below; and
- if the business has securities that are traded on a national securities exchange, Treasury must receive a warrant or other equity interest in the eligible business or, in the case of any other eligible business, Treasury can receive, in its discretion, a warrant or equity interest in the business or a senior debt instrument issued by the eligible business. The terms and conditions of these instruments will be set by Treasury and must meet the requirements set forth in the CARES Act.
Conditions on (b)(4) Assistance Programs
Recipients of direct loans from lenders under (b)(4) Assistance programs must agree:
- not to purchase an equity security that is listed on a national securities exchange of the borrower or its parent, except pursuant to existing contractual obligations for 12 months after the direct loan is no longer outstanding;
- not to pay dividends or make other capital distributions on its common stock for 12 months after the direct loan is no longer outstanding, unless waived by Treasury upon a determination that a waiver is necessary to protect the interests of the Federal Government; and
- to comply with the limitations on certain employee compensation set forth below.
Employee Compensation Limitations on Specific Industry Assistance and (b)(4) Assistance
The CARES Act places limitations on compensation of certain employees of eligible businesses receiving Specific Industry Assistance and (b)(4) Assistance. These limits require the eligible business to agree to cap all employee compensation (including salary, stock, bonuses, and other financial benefits) for a period ending one year after the loan is repaid. For employees receiving more than $425,000 per year: (i) these employees cannot receive more compensation than they received in 2019; and (ii) severance pay or other benefits upon termination cannot exceed twice the 2019 compensation amount. Officers or employees receiving more than $3 million per year cannot receive total compensation more than the sum of (i) $3 million plus (ii) 50% of the excess over $3 million.
Public Reporting Requirement
The CARES Act requires Treasury to publish on its website a plain language description about each loan and loan guarantee within 72 hours of the transaction, including the date of application, date of application approval, and identity of the counterparty. Additionally, Treasury and the Federal Reserve must report to the relevant congressional committees on transactions and the authorization of new facilities, respectively. In other words, Title IV-authorized financing transactions will not be confidential.
Continuation of Certain Air Service or Air Carrier Borrowers
The CARES Act requires the U.S. Secretary of Transportation to require, to the extent feasible, that loan or loan guarantee recipient air carriers maintain their scheduled air transportation until March 1, 2022, taking into consideration the air transportation needs of small and remote communities and the need to maintain well-functioning health care and pharmaceutical supply chains.
Unlimited Deposit Insurance Coverage on Transactional Deposit Accounts Through December 31, 2020
The CARES Act amends Section 1105 of the Dodd-Frank Act of 2010 and authorizes the Federal Deposit Insurance Corporation (FDIC) to guarantee, through December 31, 2020, the obligations of solvent insured depository institutions and their affiliates, including noninterest-bearing demand deposit accounts, without limit. This provision effectively resurrects the Transaction Account Guarantee Program of the FDIC, which the FDIC launched in October 2008 at the start of the Great Recession. The CARES Act would also give the National Credit Union Administration (NCUA) authority to increase share insurance coverage on noninterest-bearing demand deposit accounts at federally insured credit unions through December 31, 2020.
Temporary Capital Ratio Reduction for Community Banks
The CARES Act authorizes federal banking regulators to issue an interim rule that reduces the community bank leverage capital ratio from 9% to 8% and obligates regulators to provide a reasonable grace period for a qualifying community bank that falls out of compliance to regain compliance with the ratio requirements.
Temporary Relief from Troubled Debt Restructurings
The CARES Act temporarily relieves insured depository institutions from categorizing loan modifications related to the COVID-19 disease as troubled debt restructurings for purposes of compliance with the requirements of the Federal Deposit Insurance Act of 1933, as amended (12 U.S.C. §§ 1811 et seq.), until such time and under such circumstances as the appropriate federal banking agency or the NCUA determines appropriate. This provision in Title IV provides statutory endorsement to the short-term loan modification guidance published by the Financial Agencies on March 23, 2020, as discussed more fully in the next section of this Alert.
Temporary Lending Limit Waiver
The CARES Act will allow the Office of the Comptroller of the Currency (OCC) to temporarily waive the applicable loan limits for loans to non-bank financial companies (as defined in the Dodd-Frank Act) until the earlier of the: (i) the date on which the designated national emergency period terminates; and (ii) December 31, 2020.
Temporary Relief from Current Expected Credit Losses (CECL)
The CARES Act temporarily relieves insured depository institutions, bank holding companies, and any affiliates from complying with the Financial Accounting Standards Board Accounting Standards Update No. 2016–13 (Measurement of Credit Losses on Financial Instruments), including the CECL methodology for estimating allowances for credit losses, until the earlier of: (i) the date on which the designated national emergency period terminates, and (ii) Dec. 31, 2020.
Non-Applicability of Restrictions on Exchange Stabilization Fund (ESF) During National Emergency
The CARES Act temporarily suspends the restrictions of the Emergency Economic Stabilization Act of 2008 on Treasury’s use of the ESF from the date of the enactment of this Act until Dec. 31, 2020. Any guarantee that is established under this provision will be limited to a guarantee of the total value of a shareholder’s account in a participating fund as of the close of business on the day before the announcement of the guarantee. The guarantee must also terminate by Dec. 31, 2020.
Temporary Credit Union Provisions
The CARES Act broadens the definition of the kinds of credit unions to beyond only those serving “natural persons” and the eligibility requirements for those institutions to receive assistance from the Central Liquidity Facility of the NCUA. Specifically, a credit union may access liquidity if the value of such obligation does not exceed 16 times the subscribed capital stock and surplus of the facility itself. The present restriction is 12 times the capital stock and surplus. These restrictions expire Dec. 31, 2020.
Inspector General for Pandemic Recovery
Similar to the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) created by Congress at the start of the Great Recession, the CARES Act establishes within Treasury an Office of the Special Inspector General for Pandemic Recovery, appointed by the President and confirmed by the Senate. The Office will function for five years and has been granted a $25 million budget. The Special Inspector General is tasked with conducting, supervising, and coordinating audits and investigations of the making; purchase, management, and sale of loans; loan guarantees; and other investments made by the Treasury Secretary. The Special Inspector General must file quarterly reports with Congress that provide the details of all loans, loan guarantees, and other investments.
Credit Protection During COVID-19
The CARES Act amends the Fair Credit Reporting Act’s duties of furnishers of information to consumer reporting agencies. It specifically applies to the reporting obligations of creditors that provide an “accommodation” to a consumer on a credit obligation or account during the covered period of the COVID-19 pandemic. The covered period began on Jan. 31, 2020 and ends 120 days after the later of (a) enactment of the CARES Act (i.e., July 26, 2020) or (b) termination of the President’s COVID-19 outbreak national emergency proclamation.
Foreclosure Moratorium and Consumer Right to Request Forbearance
The CARES Act permits a borrower “experiencing a financial hardship” due to the COVID-19 emergency to request forbearance of a “federally backed mortgage loan,” regardless of delinquency status. The section applies to qualifying 1- to 4-family residential real property including individual condo and coop units. The borrower can receive two 180-day forbearances. The section also includes a moratorium on the initiation or moving forward on judicial or non-judicial foreclosures for not less than 60 days beginning March 18, 2020 (i.e., May 27, 2020).
Forbearance of Residential Mortgage Loan Payments for Multifamily Properties with Federally Backed Loans
The CARES Act permits a borrower “experiencing a financial hardship” due to the COVID-19 to request forbearance of a federally backed multi-family loan (5 or more units) if the loan was current as of Feb. 1, 2020. The borrower may submit an oral or written request to its servicer for forbearance of up to three 30-day periods. A borrower receiving forbearance may not evict or initiate eviction of a tenant solely for nonpayment of rent or other charges nor assess any late fees or other penalties for a tenant’s late payment of rent. Upon expiration of the applicable period of forbearance, the borrower must provide a tenant with a 30-day notice to vacate.
Temporary Moratorium on Eviction Filings
The CARES Act imposes a moratorium on lessors to initiate legal action to recover possession of a “covered dwelling” for nonpayment of rent or other charges for the 120-day period from enactment (i.e., until July 26, 2020). A covered dwelling is property (a) participating in certain Violence against Women Act housing programs or the rural voucher program, or (b) has a federally backed mortgage loan or federally backed multifamily mortgage loan. During the moratorium period, a covered dwelling lessor cannot impose any fees, penalties, or other charges to a tenant related to nonpayment of rent. Additionally, upon expiration of the moratorium period, the lessor of a covered dwelling must provide a tenant with at least 30-days notice to vacate.
Federal Reserve Stimulus Programs
Independent of the Title IV programs discussed above, the Federal Reserve has implemented or are implementing various measures designed to provide liquidity and stability to financial institutions and certain sectors of the capital markets. These initiatives include the following:
The Money Market Mutual Fund Liquidity Facility (MMLF)
The MMLF is intended to provide liquidity to Money Market Mutual Funds (Funds). The Federal Reserve Bank of Boston will lend to eligible borrowers, taking as collateral certain types of assets purchased by the borrower from Funds. Eligible borrowers are all U.S. depository institutions, U.S. bank holding companies (parent companies incorporated in the United States or their U.S. broker-dealer subsidiaries), or U.S. branches and agencies of foreign banks. The applicable Funds must identify as a Prime, Single State, or Other Tax-Exempt money market fund under item A.10 of Securities and Exchange Commission Form N-MFP. Borrowings under the MMLF will mature at the lesser of 12 months and the maturity date of the pledged collateral. Collateral that is eligible for pledge to the MMLF must be one of the following types:
- U.S. Treasuries & Fully Guaranteed Agencies.
- Securities issued by U.S. Government Sponsored Entities.
- Asset-backed commercial paper, unsecured commercial paper, or a negotiable certificate of deposit that is issued by a U.S. issuer, and that has a short-term rating at the time purchased from the Fund or pledged to the Reserve Bank in the top rating category (e.g., not lower than A1, F1, or P1, as applicable) from at least two major nationally recognized statistical rating organizations (NRSRO) or, if rated by only one major NRSRO, is rated within the top rating category by that NRSRO;
- U.S. municipal short-term debt (excluding variable rate demand notes) that:
- Has a maturity that does not exceed 12 months; and
- At the time purchased from the Fund or pledged to the Reserve Bank:
- Is rated in the top short-term rating category (e.g., rated SP1, MIG1, or F1, as applicable) by at least two major NRSROs or if rated by only one major NRSRO, is rated within the top rating category by that NRSRO: or
- If not rated in a short-term rating category, is rated in one of the top two long-term rating categories (e.g., AA or equivalent or above) by at least two major NRSROs or if rated by only one major NRSRO, is rated within the top two rating categories by that NRSRO.
- Variable rate demand notes that:
- Have a demand feature that allows holders to tender the note at their option within 12 months; and
- At the time purchased from the Fund or pledged to the Reserve Bank:
Interest rates under the MMLF depend on the type of pledged collateral. If the loan is:
- Secured by U.S. Treasuries & Fully Guaranteed Agencies or Securities issued by U.S. Government Sponsored Entities, the interest rate is equal to the primary credit rate in effect at the Reserve Bank that is offered to depository institutions at the time the advance is made; and
- Secured by U.S. municipal short-term debt, including variable rate demand notes, the interest rate is equal to the primary credit rate in effect at the Reserve Bank that is offered to depository institutions at the time the advance is made plus 25 bps.
All other advances will be made at a rate equal to the primary credit rate in effect at the Reserve Bank that is offered to depository institutions at the time the advance is made plus 100 bps. Collateral will be valued on either an amortized cost or fair value basis. For asset-backed commercial paper, unsecured commercial paper, negotiable certificates of deposit, and U.S. municipal short-term debt, including variable rate demand notes, the valuation will be amortized cost. Loans under the MMLF will be in a principal amount equal to the value of the collateral pledged to secure the advance. Loans made under the MMLF are made without recourse to the Borrower.
Regarding the regulatory capital treatment of loans under the MMLF, on March 19, 2020, the Federal Reserve, the OCC and the FDIC issued an interim final rule to allow banking organizations to neutralize the effects of purchasing assets through the program on risk-based and leveraged capital ratios.
The Commercial Paper Funding Facility (CPFF)
The CPFF, established by the Federal Reserve Bank of New York under Section 13(3) of the Federal Reserve Act, will serve as a funding backstop to facilitate the issuance of term commercial paper by eligible issuers. A special purpose vehicle (SPV) formed for purposes of creating the CPFF will purchase from eligible issuers three-month U.S. dollar-denominated commercial paper through the New York Fed’s primary dealers. Eligible issuers are U.S. issuers of commercial paper, including municipal issuers and U.S. issuers with a foreign parent company.
Eligible issues: Except as provided in the next sentence, the SPV will only purchase U.S. dollar-denominated commercial paper (including asset-backed commercial paper (ABCP) that is rated at least A1/P1/F1 by a major nationally recognized statistical rating organization (NRSRO) or, if rated by multiple major NRSROs, is rated at least A1/P1/F1 by two or more major NRSROs, in each case subject to review by the Federal Reserve. An issuer that, on March 17, 2020, was (1) rated at least A1/P1/F1 by a major NRSRO or, if rated by multiple major NRSROs, was rated at least A1/P1/F1 by two or more major NRSROs; and (2) is subsequently downgraded, will be able to make a one-time sale of commercial paper to the SPV so long as the issuer is rated at least A2/P2/F2 by a major NRSRO or, if rated by multiple major NRSROs, is rated at least A2/P2/F2 by two or more major NRSROs, in each case subject to review by the Federal Reserve. The SPV will not purchase asset-backed commercial paper (ABCP) from issuers that were inactive prior to the creation of the CPFF. An issuer will be deemed inactive if it did not issue ABCP to institutions other than the sponsoring institution for any consecutive period of three-months or longer between March 16, 2019 and March 16, 2020.
Program limits per issuer: The maximum amount of a single issuer’s commercial paper the SPV may own at any time will be the greatest amount of U.S. dollar-denominated commercial paper the issuer had outstanding on any day between March 16, 2019 and March 16, 2020. The SPV will not purchase additional commercial paper from an issuer whose total commercial paper outstanding to all investors (including the SPV) equals or exceeds the issuer’s limit. For an issuer that, on March 17, 2020, was (1) rated at least A1/P1/F1 by a major NRSRO or, if rated by multiple major NRSROs, was rated at least A1/P1/F1 by two or more major NRSROs; and (2) is rated at least A2/P2/F2 by a major NRSRO or, if rated by multiple major NRSROs, is rated at least A2/P2/F2 by two or more major NRSROs, the maximum amount of the issuer’s commercial paper that the SPV will purchase is the amount of U.S. dollar-denominated commercial paper the issuer had outstanding the day before it was downgraded.
Interest Rates and Facility Fees: For commercial paper rated A1/P1/F1, pricing will be based on the then-current 3-month overnight index swap (OIS) rate plus 110 basis points. For commercial paper rated A2/P2/F2, pricing will be based on the then-current 3-month OIS rate plus 200 basis points. At the time of its registration to use the CPFF, each issuer must pay a facility fee equal to 10 basis points of the maximum amount of its commercial paper the SPV may own.
Termination date: The SPV will cease purchasing commercial paper on March 17, 2021, unless the Board extends the facility. The New York Fed will continue to fund the SPV after such date until the SPV’s underlying assets mature.
The Term Asset-Backed Securities Loan Facility (TALF)
The TALF is a credit facility authorized under section 13(3) of the Federal Reserve Act intended to help meet the credit needs of consumers and small businesses by facilitating the issuance of asset-backed securities (ABS) and improving the market conditions for ABS more generally. The loans under TALF will have a term of three years; will be nonrecourse to the borrower; and will be fully secured by eligible ABS.
Eligibility: Eligible borrowers under the TALF include all U.S. companies that own eligible collateral and maintain an account relationship with a primary dealer. A U.S. company is defined as a U.S. business entity organized under the laws of the United States or a political subdivision or territory thereof (including such an entity that has a non-U.S. parent company), or a U.S. branch or agency of a foreign bank.
Collateral: Eligible collateral under TALF includes U.S. dollar denominated cash (that is, not synthetic) ABS that have a credit rating in the highest long-term or the highest short-term investment-grade rating category from at least two eligible nationally recognized statistical rating organizations (NRSROs) and do not have a credit rating below the highest investment-grade rating category from an eligible NRSRO. All or substantially all the credit exposures underlying eligible ABS must have been originated by a U.S. company. Eligible ABS must be issued on or after March 23, 2020. In addition, eligible collateral must be ABS where the underlying credit exposures are one of the following:
- Auto loans and leases;
- Student loans; credit card receivables (both consumer and corporate); equipment loans; floorplan loans; insurance premium finance loans; certain small business loans that are guaranteed by the Small Business Administration; or eligible servicing advance receivables.
Eligible collateral will not include ABS that bear interest payments that step up or step down to predetermined levels on specific dates. In addition, the underlying credit exposures of eligible collateral must not include exposures that are themselves cash ABS or synthetic ABS. To be eligible collateral, all or substantially all the underlying credit exposures must be newly issued.
Other key TALF terms include:
Collateral Valuation: The pledged eligible collateral will be valued and assigned a haircut according to a schedule based on its sector, the weighted average life, and historical volatility of the ABS. The haircut schedule will be published in the detailed terms and conditions and will be roughly in line with the haircut schedule used for the TALF Facility established in 2008.
Interest Rates and Facility Fees: For eligible ABS with underlying credit exposures that do not have a government guarantee, the interest rate will be 100 basis points over the 2-year London Inter-bank Offered Rate (LIBOR) swap rate for securities with a weighted average life less than two years, or 100 basis points over the 3-year LIBOR swap rate for securities with a weighted average life of two years or greater. The interest rate for other eligible ABS will be set forth in the detailed terms and conditions. Borrowers will be assessed an administrative fee equal to 10 basis points of the loan amount on the settlement date for collateral.
Maturity: Each loan provided under this facility will have a maturity of three years.
Prepayment: Loans made under the TALF will be pre-payable in whole or in part at the option of the borrower, but substitution of collateral during the term of the loan generally will not be allowed.
Termination: No new credit extensions will be made after Sept. 30, 2020, unless the TALF is extended by the Board of Governors of the Federal Reserve System.
Primary Market Corporate Credit Facility (PMCCF)
The PMCCF will serve as a funding backstop for corporate debt issued by eligible issuers and will be established under Section 13(3) of the Federal Reserve Act by the Federal Reserve Bank of New York. The PMCCF Facility will purchase eligible corporate bonds directly from eligible issuers and will make eligible loans to eligible issuers. Eligible corporate bonds and loans must meet each of the following criteria at the time of bond purchase or loan origination by the Facility:
- Issued by an eligible issuer.
- Issuer is rated at least BBB-/Baa3 by a major NRSRO and, if rated by multiple major NRSROs, rated at least BBB-/Baa3 by two or more NRSROs, in each case subject to review by the Federal Reserve; and
- Have a maturity of four years or less.
Eligible issuers are U.S. companies headquartered in the United States and with material operations in the United States. Eligible issuers do not include companies that are expected to receive direct financial assistance under pending federal legislation, including the CARES Act.
Limits: The maximum amount of outstanding bonds or loans of an eligible issuer that borrows from the Facility may not exceed the applicable percentage of the issuer’s maximum outstanding bonds and loans on any day between March 22, 2019 and March 22, 2020:
- 140 percent for eligible assets/eligible issuers with a AAA/Aaa rating from a major NRSRO;
- 130 percent for eligible assets/eligible issuers with a AA/Aa rating from a major NRSRO;
- 120 percent for eligible assets/eligible issuers with an A/A rating from a major NRSRO; or
- 110 percent for eligible assets/eligible issuers with a BBB/Baa rating from a major NRSRO.
Bonds and loans under the PMCCF Facility are callable by the eligible issuer at any time at par.
Interest Rates, Fees and PIK Provisions: The PMCCF Facility will purchase bonds and make loans that have interest rates informed by market conditions. At the borrower’s election, all or a portion of the interest due and payable on each interest payment date may be payable in kind for 6 months, extendable at the discretion of the Board of Governors of the Federal Reserve System. A borrower that makes a PIK election may not pay dividends or make stock buybacks during the period it is not paying interest. The commitment fee will be set at 100 bps.
Termination: The PMCCF Facility will cease purchasing eligible corporate bonds or extending loans on Sept. 30, 2020, unless the Facility is extended by the Board of Governors of the Federal Reserve System.
The Secondary Market Corporate Credit Facility (SMCCF)
Under the SMCCF, the Federal Reserve Bank of New York will establish, under Section 13(3) of the Federal Reserve Act, an SPV to purchase in the secondary market corporate debt issued by eligible issuers. The SPV will purchase eligible individual corporate bonds as well as eligible corporate bond portfolios in the form of exchange traded funds (ETFs) in the secondary market.
Eligible Individual Corporate Bonds: The SMCFF may purchase corporate bonds that meet each of the following criteria at the time of purchase:
- Issued by an eligible issuer.
- Rated at least BBB-/Baa3 by a major NRSRO and, if rated by multiple major NRSROs, rated at least BBB-/Baa3 by two or more NRSROs, in each case subject to review by the Federal Reserve.
- Have a remaining maturity of five years or less.
Eligible ETFs: The SMCCF may also purchase U.S.-listed ETFs whose investment objective is to provide broad exposure to the market for U.S. investment grade corporate bonds.
Eligible issuers for direct purchases of individual corporate bonds on the secondary market are U.S. businesses with material operations in the United States. Eligible issuers do not include companies that are expected to receive direct financial assistance under pending federal legislation, including the CARES Act. The maximum amount of bonds that the SMCCF will purchase from any eligible issuer will be capped at 10 percent of the issuer’s maximum bonds outstanding on any day between March 22, 2019 and March 22, 2020. The facility will not purchase more than 20% of the assets of any particular ETF as of March 22, 2020. The SMCCF will purchase eligible corporate bonds at fair market value in the secondary market. The Facility will avoid purchasing shares of eligible ETFs when they trade at prices that materially exceed the estimated net asset value of the underlying portfolio.
Termination: The SMCCF will cease purchasing eligible corporate bonds and eligible ETFs no later than Sept. 30, 2020, unless the Facility is extended by the Federal Reserve.
Actions Taken by the Financial Agencies to Encourage Lending and Facilitate Loan Modifications
In addition to the financial stimulus programs found in Title IV of the CARES Act and those launched (and in some cases re-launched) by Treasury and the Federal Reserve, the Financial Agencies have taken several piecemeal actions since the start of the crisis to encourage new lending and facilitate short-term loan modifications. These actions include:
- Meeting the Financial Needs of Affected Borrowers. On March 9, 2020, the Federal Reserve, FDIC, OCC, NCUA and state bank regulators issued a statement “encouraging” financial institutions to meet the financial services needs of their customers and members in areas affected by COVID-19.
- Community Reinvestment Act Favorable Consideration. On March 19, 2020, the Federal Reserve, FDIC, and OCC issued a joint statement on Community Reinvestment Act (CRA) consideration for activities in response to COVID-19, stating that for CRA purposes, the agencies will favorably consider retail banking and lending activities that meet the needs of affected low- and moderate-income individuals, small businesses, and small farms, consistent with safe and sound banking practices and applicable laws, including consumer protection laws. The CRA joint statement noted such activities could include offering short-term, unsecured credit products.
- Short-Term Loan Modifications. On March 23, 2020, the OCC, FDIC, NCUA, Federal Reserve, the Consumer Financial Protection Bureau and the State Conference of Bank Supervisors issued an Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus. The Guidance does two key things:
- Short-term loan modifications (for loans of all types) granted to borrowers that have become financially distressed as a result of economic conditions created by COVID-19 will not result in a loan being classified a troubled debt restructuring (TDR). According to U.S. GAAP, a restructuring of a loan or other credit constitutes a TDR if the lender/creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider.
The banking agencies have confirmed with staff of the Financial Accounting Standards Board that short-term (e.g., six months or less) loan modifications made on a good faith basis in response to COVID-19 for borrowers who were current prior to any relief, are not TDRs. Modification actions can include payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.
- Furthermore, bank regulators will not criticize bankers for granting short-term loan modification relief, if the action taken is done in good faith. The explicit statement in the Guidance that bankers will not be criticized by their regulators removes a significant impediment to bankers providing short-term loan modification relief – an impediment that chilled bankers in the months and years following the 2008/2009 Financial Crisis from providing such relief.
- Small-Dollar Loans to Consumers and Small Businesses. On March 26, 2020, the Federal Reserve, FDIC, OCC, NCUA and CFPB issued a joint statement “encouraging” banks, savings associations and credit unions to offer responsible small-dollar loans to consumers and small businesses in response to COVID-19. According to the agencies, “[s]uch loans can be offered through a variety of structures including open-end lines of credit, closed-end installment loans, or appropriately structured single payment loans.”
For more information and updates on the developing COVID-19 situation, visit GT’s Health Emergency Preparedness Task Force: Coronavirus Disease 2019 or GT’s Economic Stimulus Team.
 This includes U.S. territories or possessions and Indian Tribes.
 For purposes of the CARES Act, “state” includes U.S. territories and possessions and Indian Tribes.
 This Alert does not address the independent efforts of various state legislative and state regulatory authorities to provide relief to individual and corporate borrowers whose personal finances or businesses have been adversely affected by COVID-19. For instance, on March 21, 2020, New York Governor Andrew Cuomo signed an Executive Order, No. 202.9, Continuing Temporary Suspension and Modification of Laws Relating to Disaster Emergency (the Executive Order). It modifies Section 39(2) of the New York Banking Law to provide that it is an unsafe and unsound business practice for any New York-licensed bank not to grant a 90-day forbearance to any person or business who has a financial hardship as a result of the COVID-19 pandemic. On March 24, 2020, the New York Department of Financial Services (NYDFS) adopted regulations pursuant to the Executive Order requiring NYDFS-regulated institutions to make applications for forbearance of any payment due on a New York residential mortgage available to any New York resident and who demonstrates financial hardship as a result of the COVID-19 pandemic.
 Of the five programs discussed in this section, MMLF, CPFF, TALF, PMCCF and SMCCF, only MMLF has published regulations. The others exist as term sheets, dated March 23, 2020, on the Federal Reserve’s website, which can be found here: https://www.federalreserve.gov/newsevents/pressreleases/monetary20200323b.htm.
- COVID-19 Federal Legislative and Regulatory Economic Stabilization Programs – What Your Business Needs to Know
This article was originally published by Greenberg Traurig, LLP, on March 28, 2020.
Key Provisions for General Aviation Businesses in the CARES Act see more
NAFA members, Edward Kammerer and Thomas Richardson with Greenberg Traurig, LLP., share key provisions for the general aviation businesses in the CARES Act.
On March 27, 2020, the $2 trillion stimulus bill known as the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) was signed into law. While the CARES Act sets aside $250 billion of direct payments to individuals and families and $377 billion in small business loans, it also contains provisions that directly support general aviation. The general aviation community should be aware of the following elements within the CARES Act:
1. Temporary suspension through the end of the year of federal excise taxes for commercial operations, including the 7.5% FET applicable to Part 135 charter flights.
2. The suspension of the tax on aviation fuel until January 1, 2021.
3. A series of extensions allowing Part 135 charter operators to temporarily postpone certain training requirements related to crew safety concerns.
4. Allowing up to an additional three months to complete recurrent and upgrade training and qualification activities.
5. Relief allowing airmen whose medical certificates expire between March 31 and June 30 to continue to fly in order to reduce stress on the nation’s healthcare system.
6. $25 billion in direct lending and loan guarantees for passenger air carriers, including Part 135 charter operators, and Part 145 repair stations.
7. $4 billion in direct lending and loan guarantees and $4 billion in grants for cargo air carriers, including Part 135 operators that conduct cargo charter operations.
8. $3 billion in grants for aviation industry contractors.
9. Congress further allocated an additional $25 billion in grants for passenger air carriers and $4 Billion in grants for cargo air carriers that are for continued payment of wages to employees.
10. $10 billion in grants allocated for airports, a significant portion of which was designated for improvement of General Aviation airports. These loans and grants come with restrictions and eligibility requirements. Loan and grant recipients are subject to employee retention requirements and restrictions on executive compensation, stock buybacks and dividends.
Because much of the General Aviation Community is comprised of small businesses, the GA Community should be aware of those provisions of the CARES Act that are generally available to small businesses:
1. $350 billion in funds available for loans through a “Paycheck Protection Program.” Loans will have no fees and are available in amounts up to 250% of an employer’s average monthly payroll, up to $10 million. Payment of principal and interest can be deferred up to a year. Up to eight weeks of average payroll and other costs may be forgiven if the business retains its employees at current salary levels.
2. $10 billion is available for an advance up to $10,000 in SBA Economic Injury Disaster Loans that may be used for expenses, including payroll and other operating expenses that would otherwise have been met had the COVID-19 pandemic not occurred. The principal amount of these loans can be up to $2 million, with an interest rate of up to 3.75%. Payment of principal and interest can be deferred up to a year.
3. An additional $17 billion is provided to cover six months loan payments for existing SBA borrowers. This relief is also available to new borrowers that take out an SBA loan within six months of the signing of the CARES Act into law.
For more information and updates on the developing COVID-19 situation, visit GT’s Health Emergency Preparedness Task Force: Coronavirus Disease 2019.
 CARES Act relies on 40 U.S. Code §40102(a)(2) to define “air carrier” as “a citizen of the United States undertaking by any means, directly or indirectly, to provide air transportation.”
 Under the CARES Act, this is includes a small business, 501(c)(3) nonprofits, 501(c)(19) veteran’s organization, or Tribal business concern described in section 31(b)(2)(C) of the Small Business Act with not more than 500 employees, or the applicable size standard for the industry as provided by SBA, if higher. Sole-proprietors and independent contractors may also avail themselves of this relief.
 Section 7(A) of the Small Business Act, 15 U.S.C. 636(a).
This article was originally published by Greenberg Traurig, LLP. on March 30, 2020.
Ain’t Nobody’s Business see more
NAFA member, Edward Kammerer, with Greenberg Traurig, discusses aircraft ownership privacy and security.
When asked why you use business aircraft, you likely would list “security” and privacy” among your top reasons. These legitimate and valid concerns include industrial security, personal security, a desire to keep trips and destinations confidential, and a good old fashioned sense of MYOB.
Many owners go to great lengths to keep the identity of their aircraft and their flying patterns hidden from view. However, despite owners’ best efforts, prying eyes easily can detect and track aircraft and identify their owners. Information available at the FAA Registry and other publicly available government filings, as well as aircraft information websites and services, make aircraft ownership information and destinations easy to obtain.
How Private and Secure is Your Aircraft?
Many aircraft are owned in LLCs formed just for this purpose. While the names of such LLCs may intentionally obfuscate the identify of the aircraft’s “true owner,” public information regarding the ownership and management of such LLCs often point to a company or individual owner. Additionally, services such as JetNet and Amstat are very effective at revealing an aircraft’s “true ownership.”
Contrary to what many think, taking title to an aircraft in an “Owner Trust” does not protect the owner’s identity. The name of the beneficiary of an Owner Trust must be disclosed in the aircraft’s publicly available registration documents. The use of a so-called “Double Trust Structure” can be effective to shield an owner’s identity. A Double Trust uses an Owner Trust with a second trust as the beneficial owner of the Owner Trust. The name of the second trust is a matter of public record, but the name of true owner of the second trust is hidden. Even with a Double Trust, the identity of the true owner can be discovered if the owners are not vigilant.
Anyone with an internet connection can track an aircraft simply by typing a tail number into aircraft tracking websites such as Flightaware.com or various other “plane spotter” websites.
The January 1 requirement that aircraft update their navigation tracking systems to ADS-B standards makes following aircraft movements an option for anyone with readily available and inexpensive equipment. Fortunately, the FAA and the National Business Aviation Association (NBAA) recently announced a program which will allow an owner to block public tracking of real-time positioning and identification information for ADS-B compliant aircraft.
What Can You Do?
While there are no fail-safe methods of keeping your aircraft’s ownership and movements secure, there are several precautionary measures which you can take to help preserve privacy and security.
- Avoid the use of vanity tail numbers and identifying marks on your aircraft which may provide telltale clues to ownership.
- Carefully monitor the identity of signatories to public documents. The identity of the “true owner” of an aircraft can be disclosed by cross-referencing the names of LLC documents to the “true owner” through websites such as LinkedIn. Documents filed at the FAA, such as tail number reservations and re-assignment, can help a determined investigator connect the dots between the true owner and the actual registrant.
- Double Trust structures, if properly formed and vigilantly monitored, can help protect your identity.
- By making an Aircraft Situation Display to Industry (f/k/a as NBAA’s “BARR Program”) blocking request, owners and operators can opt out of having their aircraft information broadcast over the internet.
- Sign up for the NBAA/FAA Program which allows your ADS-B tracking data to be broadcast in a format which is not readily accessible to the public.
Modern technology makes keeping your aircraft’s identity and location private and secure more difficult than ever. However, by taking a few simple precautions, you can shield your identity and aircraft movements from your competition, the media, those with political motivations, and the curious general public.
This article was originally published by Business Aviation Advisor on January 1, 2020.
Greenberg Traurig Joins National Aircraft Finance Association see more
FOR IMMEDIATE RELEASE
EDGEWATER, Md. – Aug. 1, 2019 –The National Aircraft Finance Association (NAFA) is pleased to announce that global law firm Greenberg Traurig, LLP has joined its professional network of aviation service providers.
“NAFA members form a network of aviation finance services who diligently and competently operate with integrity and objectivity throughout the world. We’re excited to welcome Greenberg Traurig to our growing organization as we head to our 50th anniversary,” said Jim Blessing, president of NAFA.
Greenberg Traurig’s Business Aviation Practice represents owners and operators of business aircrafts, financial institutions, leasing companies, corporations, airlines, and other aviation-related businesses on a variety of finance, leasing, commercial, and related corporate matters. The team is skilled in advising both domestic and foreign airlines, lessors, and lenders on aircraft, engines, and parts financings; purchases and sales of aircraft and aircraft portfolios; equipment leasing matters; as well as airline investments and other aviation-related commercial and operational matters. Attorneys capitalize on the firm’s global resources by working closely with restructuring, tax, private wealth, antitrust, governmental affairs, intellectual property, environmental, and labor and employment colleagues to develop multifaceted strategies that meet clients’ aviation needs.
Business aviation attorney Edward Kammerer, a longstanding contributor to and recent board member of NAFA, recently joined Greenberg Traurig as a shareholder. He advises the business aviation community on a wide range of transactions and issues, with a special focus on aircraft acquisitions and finance. With 40 years of experience, he represents major corporations, mid-sized companies, family offices, corporate executives, entrepreneurs, and business owners, helping them to acquire, operate, finance, and sell private aircrafts. Kammerer has previously served as in-house counsel for three leading equipment finance companies, including affiliates of two major banks and one leading insurance company. He had responsibility for the development of standard form financing documents and approved documentation of inbound and outbound syndicated secured financings. Kammerer is admitted in New York, Rhode Island, and Connecticut.
About Greenberg Traurig: Greenberg Traurig, LLP(GT) has more than 2,100 attorneys in 41 offices in the United States, Latin America, Europe, Asia, and the Middle East. GT has been recognized for its philanthropic giving, diversity, and innovation, and is consistently among the largest firms in the U.S. on the Law360400 and among the Top 20 on the Am Law Global 100. Web: http://www.gtlaw.com Twitter: @GT_Law.
About NAFA: The National Aircraft Finance Association (NAFA)is a non-profit corporation dedicated to promoting the general welfare of individuals and organizations providing aircraft financing and loans secured by aircraft; improving the industry's service to the public; and providing our members with a forum for education and the sharing of information and knowledge to encourage the financing, leasing and insuring of general aviation aircraft. For more information about NAFA, visit NAFA.aero.