We recently distributed an alert that provided a comprehensive description of the Phase 3 stimulus bill signed by the president on Friday, March 27 (the Coronavirus Aid, Relief, and Economic Security (CARES) Act). We thought it would be helpful to our private equity clients and their portfolio companies to highlight certain aspects of the loan programs and other relief included in the CARES Act and other recent stimulus legislation. Our alert can also be found here: COVID-19 Update: Financial Assistance Programs.
Expansion of the SBA 7(a) Loan Program — Paycheck Protection Program
Eligible Borrowers: Through June 30, 2020, qualifying businesses with fewer than 500 employees or, if applicable, the size standard in number of employees established by the SBA for the industry in which the entity operates, will be eligible to receive federally guaranteed loans under the new $349 billion Paycheck Protection Program (PPP).
PPP Lenders: During the pendency of the COVID-19 national emergency, in addition to lenders previously approved by the SBA to provide Section 7(a) loans that may choose to opt in to the PPP, the CARES Act permits the Treasury Department and the SBA to designate additional qualified lenders to participate in the PPP.
Additional implementation rules are expected as the PPP rolls out, and we will be closely monitoring how the affiliation rules (and the waivers in the CARES Act) are to be applied to the PPP.
Title IV Loan Programs
Title IV of the CARES Act, called the Coronavirus Economic Stabilization Act of 2020 (CESA), allocates $500 billion to make loans, loan guarantees and other investments to businesses, states and municipalities (BSM). Loans made pursuant to CESA are not subject to the size-based eligibility standards of the PPP or the use of proceeds restrictions. Loans under CESA are also not subject to forgiveness and will contain requirements that the borrower maintain 90 percent of its workforce (at full compensation and benefits) until Sept. 30, restore not less than 90 percent of its workforce to Feb. 1 levels no later than four months after the end of the COVID-19 national emergency, and not outsource or offshore jobs for the term of the loan, plus two years. In addition, loans under CESA may subject the borrower (and in some cases affiliates of the borrower) to restrictions on distributions, dividends and stock buybacks, as well as restrictions on executive compensation.
Loans to Companies in Specified Distressed Industries or that are Critical to National Security: Portfolio companies that operate in the passenger air or related businesses or the air cargo business may be eligible to participate in CESA’s $29 billion direct loan program or that operate businesses critical to maintaining national security may be eligible to participate in CESA’s $17 billion direct loan program, each of which is summarized here: COVID-19 Update: CARES Act Economic Stabilization Update. Direct loan determinations will be made, and such programs will be overseen, by the Treasury Department. It has been reported that the security-critical loan program is primarily intended for Boeing and other large defense contractors/manufacturers.
BSM Loans: CESA establishes a $454 billion program to be used for loans and loan guarantees and other investments in programs or facilities established by the Federal Reserve for purposes of providing liquidity to the financial system that supports lending to eligible U.S. BSM that do not fall into any of the above categories. Amounts available under the BSM program may be increased by amounts not used in the specific distressed industries or security critical programs.
The BSM loan program will be composed of direct loans made by the Treasury Department subject to restrictions on stock buybacks, dividends and compensation for employees making more than $425,000 in total compensation. CESA also authorizes the Treasury Department to establish loan programs or credit facilities to provide financing to banks and other lenders that make direct loans to eligible midsize businesses. Prospective borrowers under the midsized business loan program administered through lenders will need to make certain certifications as we summarize in the Alert (including a certification that the uncertainty of economic conditions make necessary the loan request to support ongoing operations of the borrower, the borrower will maintain 90% of its workforce at full compensation and benefits until September 30, 2020 and the borrower intends to restore its workforce to not less than 90% of February 1, 2020 levels, at full compensation and benefits within 4 months of the end of the COVID-19 national emergency). Borrowers under the midsized business loan program may also be subject to the above-described compensation restrictions.
Specific details of each program and additional implementation guidance and regulations are expected in the coming days, and we will provide further details as they emerge.
Additional Considerations
Employment Considerations: Private equity firms and portfolio companies should take into account the following considerations when utilizing the below options to reduce expenses during this extraordinary period:
Note that implementing certain of these actions may impact a business’s ability to obtain relief under various provisions of the CARES Act.
In addition, the current business disruption as a result of the COVID-19 crisis will likely impact annual or long-term performance goals. For private equity firms and portfolio companies that have not yet set annual performance goals, they may consider waiting until there is less economic uncertainty to establish the metrics or explicitly reserve the right to adjust metrics for the impact of COVID-19. Private equity firms and portfolio companies that have already established metrics or are in the middle of a performance period should review and continue to monitor their goals to make sure they continue to provide the right incentives in the current environment. If a private equity firm or portfolio company has concerns regarding its cash flow, it should consider whether it has the flexibility to settle bonuses in equity.
Pension Relief: The CARES Act provides for limited funding relief for single-employer pension plans, allowing those plans to defer any minimum funding contributions (quarterly or annual) that are due in 2020 until Jan. 1, 2021 (at which time they will be paid with interest). For portfolio companies that sponsor a single-employer pension plan and are experiencing cash flow concerns, the ability to defer those payments for the next several months can provide additional near-term liquidity.
Further discussion of the employee benefits-related provisions of the CARES Act can be found here: COVID-19 Update: Retirement Relief in the CARES Act.
Families First Coronavirus Response Act (FFCRA) Employment Considerations: The FFCRA, which includes the Emergency Paid Sick Leave Act (EPSLA) and the Emergency Family and Medical Leave Expansion Act (EFMLEA), goes into effect on April 1.
Further discussion of the employment-related provisions of the EFMLEA can be found here: COVID-19 Update: Payroll Tax Credits for Paid Sick Leave and Child Care Leave Authorized for Eligible Employers with Workers Impacted by the COVID-19 Pandemic.
Tax Considerations: The following provisions enacted by Congress in the CARES Act and the FFCRA and actions taken by the Treasury Department can alleviate cash flow concerns for businesses:
Further discussion of the tax-related provisions of the CARES Act can be found here: COVID-19 Update: Tax-Related Provisions of the CARES Act and COVID-19 Update: Payroll Tax Credits for Paid Sick Leave and Child Care Leave Authorized for Eligible Employers with Workers Impacted by the COVID-19 Pandemic.
We will continue to distribute alerts addressing issues related to the COVID-19 national emergency, including providing timely information on how the new legislation and accompanying regulations may affect your businesses.