March 27, 2020
Coronavirus Stimulus & Relief Alert
Coronavirus Stimulus & Relief Alert
The new federal stimulus program provides a range of support and relief options for a great many businesses. We discuss the new program and how clients can tap into these funds.
On March 27, 2020, H.R. 748 (the Act) was passed to provide emergency assistance and a health care response for individuals, families, and businesses affected by the 2020 coronavirus pandemic. The Act has five principal sections: Title I (Keeping Workers Paid and Employed, Health Care System Enhancements, and Economic Stabilization); Title II (Assistance for American Workers, Families, and Businesses); Title III (Supporting American’s Health Care System in the Fight Against the Coronavirus); Title IV (Economic Stabilization and Assistance to Severely Distressed Sectors of the United States Economy); and Title V (Coronavirus Relief Funds).
This alert primarily focuses on the provisions of the Act that have the broadest applicability to commercial businesses during this time of crisis, which are generally located in Title I (Keeping American Workers Paid and Employed Act) and Title IV (Economic Stabilization and Assistance to Severely Distressed Sectors of the United States Economy). More specific topics of interest to commercial businesses, such as labor and tax matters, are not covered in this alert but will be addressed in future alerts. Similarly, more specialized industries, such as health care and housing, will be discussed in future thought leadership.
Title II of the Act provides for additional economic assistance for small businesses in the form of loans, grants, and debt relief as well as more narrowly tailored programs. Specifically, the bill provides for, among other things, the following programs and relief:
Significant expansion of small business loan program
The bill authorizes $349 billion through June 30, 2020, to expand the existing Small Business Association (the SBA) Section 7(a) loan program. The program is structured in a way that is intended to incentivize employers to continue to employ its workers and to pay employee benefits.
The Secretary of the Treasury has the authority to approve new lenders to make loans under the 7(a) program. Each lender will process, close, disburse, and service its loans.
Lenders are to consider whether the borrower was in operation on February 15, 2020, and had employees for whom the borrower paid salaries and payroll taxes or paid independent contractors. Notably, whether the borrower can seek credit elsewhere is not to be considered by the Lender.
Borrower must make a good faith certification that current economic conditions caused the borrower to request support, the loan will be used for approved uses, and the borrower is not also seeking or received a SBA 7(a) loan for the same purpose.
A borrower that received an EIDL loan for a purpose other than the permitted uses during the period January 31, 2020, through the date that loans are available under this program can still access these loans. Moreover, borrowers who have an existing EIDL loan may refinance that loan in the process of applying for a new loan under this Act.
Subject to the adjustments described below, indebtedness will be forgiven, up to the principal amount of the loan, in an amount equal to the sum of payments made during the 8-week period after incurrence of the loan (the Determination Period) for payroll, utilities, rent, and mortgage obligations (other than principal).
Loan forgiveness adjustments
The loan forgiveness amount will be reduced as follows:
Collateral and personal guarantees
Maturity and interest rate
The maximum borrowing amount under an SBA Express Loan was temporarily increased from $350,000 to $1,000,000 through December 31, 2020, after which, the maximum borrowing amount will be $350,000.
The SBA Administrator will publish applicable regulations within 30 days after enactment of the Act. This is significant because it will cause some delay in the loan process. See the EIDL grant program, which is meant to address this deficiency.
The Act allows the SBA to provide grants to small business development centers, and women’s business development centers, which are being funded to assist borrowers. The SBA may also provide grants to establish an online platform and training resources.
Economic injury disaster loan (EIDL) emergency grants
$10 billion has been allocated for this purpose. Businesses who are eligible for a loan described above are also eligible to apply for a grant in an amount up to $10,000, which will be advanced prior to receiving the full loan amount. In addition, the EIDL program under 7(b) has been modified to, among other things, expand the scope of covered entities.
$17 billion has been allocated for this purpose. More specifically, the SBA will make payments of principal, interest, and fees on loans guaranteed by the SBA as follows:
Title IV of the Act, also referred to as the Economic Stabilization and Assistance to Severely Distressed Sectors of the United States Economy (the Economic Stabilization Act), authorizes the Secretary to provide up to $500 billion in loans, loan guarantees, and other investments in support of eligible businesses, states and municipalities. The authorization to make these investments expires on December 31, 2020. While included in this portion of the Act, this alert does not discuss the relief and programs provided with respect to financial institutions. The Economic Stabilization Act provides, among other things, loans and loan guarantees and other investments in the following amounts to businesses that have not otherwise received adequate economic relief:
In order to receive the foregoing relief under the Economic Stabilization Act, businesses must meet eligibility requirements and abide by certain terms and conditions. Of note, these general requirements include:
The interest rate will be based upon risk and the current average yield on outstanding marketable U.S. obligations of comparable maturity.
Unlike the SBA Section 7(a) program, there is no option for loan forgiveness.
For investments in or to passenger aircraft carriers and certain related businesses (collectively, Passenger Aircraft Carriers), cargo aircraft carriers, and critical national security businesses (collectively, Specified Businesses), the Secretary will issue guidelines for eligibility and repayment terms within ten days of the enactment of the Act.
Terms and conditions for specified businesses
Equity compensation component
The eligible business will issue to the federal government (i) warrants or other equity interests, if the business has public securities or (ii) if the business does not have public securities, either, in discretion of the Secretary, (a) warrants or other equity interests or (b) a senior debt instrument. If the Secretary determines that it is not feasible for the eligible business to issue warrants or other equity interests as required, then a senior debt instrument may be issued instead. The federal government will not exercise any voting rights under any granted common stock.
Executive compensation restrictions
While the applicable loan or loan guarantee is outstanding and for 12 months thereafter, (i) no employee that received more than $425,000 in total compensation in 2019 may receive (a) more than such employee’s total compensation in 2019 in any 12-month period and (b) more than twice such employee’s total compensation in 2019 in the form of severance or other benefits upon termination of employment and (ii) no employee that received more than $3,000,000 in total compensation in 2019 may receive during any 12-month period more than $3,000,000 plus 50% of such employee’s total compensation in 2019 in excess of $3,000,000.
Passenger aircraft carriers
In addition to above, Secretary of Transportation is authorized to require scheduled air transportation services to any location served by that carrier before March 1, 2020. Further, a separate $30 billion program has been established for employee wages, salaries, and benefits.
Type of investments
The investments in this category, which may be in the form of loans, loan guarantees, or otherwise, shall be made through programs and facilities established by the Federal Reserve and may be made directly or in the secondary market. The requirements of Section 13(3) of the Federal Reserve Act, including requirements relating to loan collateralization, taxpayer protection, and borrower insolvency, apply to any such program or facility.
Terms and conditions for other eligible businesses
The Secretary may waive the specified terms and conditions identified above, and, if so, the Secretary must testify before the House and Senate regarding the reasons for the waiver.
Special inspector general
The Office of the Special Inspector General for Pandemic Recovery will be established within the Department of the Treasury; the head of this office will be the Special Inspector General for Pandemic Recovery (the Special Inspector General), who will be appointed by the President, by and with the advice and consent of the Senate. The Special Inspector General will conduct, supervise and coordinate investigations and audits of investments made pursuant to the Economic Stabilization Act, and the management by the Secretary of any programs established thereunder. The Special Inspector General is required to publish a report within 60 days of being confirmed and quarterly thereafter.
Assistance for mid-size businesses (not yet established)
As noted above, investments in this category are to be made through programs and facilities provided by the Federal Reserve. The Economic Stabilization Act contains a directive to the Secretary “to endeavor to seek the implementation of” a program to lend to financial institutions that in turn make direct loans to eligible businesses, including nonprofit organizations to the extent practicable, of between 500 and 10,000 employees (the Mid-Size Business Program). These direct loans would not require principal or interest payments within the first six months and the interest rate would not exceed 2%. This program is in addition to any other programs or facilities established by the Federal Reserve, including the “Main Street Lending Program” or similar programs or facilities.
Terms and conditions for mid-size business program
The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.
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