CARES Act: Assistance for Severely Distressed Sections of the Economy, Including the Airline Industry and Non Profits

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Details on Support Availability

The CARES Act authorizes the Secretary of the Treasury (the “Secretary”) to make loans, loan guarantees, and investments in financial support of eligible businesses, States, and municipalities that do not, in the aggregate, exceed $500 billion, as well as subsidy amounts for such loans and guarantees.

Support for shall be made available as follows:

  1. Up to $25 billion will be allocated for funds to passenger air carriers and certain others in related commercial airline businesses;
  2. Up to $4 billion for cargo air carriers;
  3. Up to $17 billion for businesses critical to maintaining national security; and
  4. Up to $454 billion, and any amounts remaining from the above categories, which will be allocated to provide loan funds to programs or facilities established by the Board of Governors of the Federal Reserve System to provide liquidity to the system that supports lending to eligible businesses, States, and municipalities.

The Act further provides that financial support shall be made on terms and conditions deemed appropriate by the Secretary and instructs the Secretary to establish procedures and minimum requirements within 10 days of enactment of the Act.

Importantly, the CARE Act mandates that, in order to receive loans, eligible businesses must agree to certain employee compensation parameters for those at the highest compensation levels.

In addition to the previously summarized provisions, the Act also directs the Secretary to implement a program that provides financing to banks and other lenders that make direct loans to eligible businesses, including, to the extent possible, nonprofit organizations, with between 500 and 10,000 employees. The loans to these entities would be subject to an interest rate of 2% or less, annually; and at least a 6-month grace period with no principal or interest due. To receive these funds, eligible borrowers must certify that they need the loan as a result of their current economic condition and that they will use the funds to retain at least 90% of their workforce, at full compensation and benefits, until September 30, 2020, among other things.

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Definitions

  • “Air Carrier” – same as defined under section 40102 of Title 49.
  • “Coronavirus” – SARS-CoV-2 or another coronavirus with pandemic potential
  • “Covered loss” – losses incurred directly or indirectly as a result of the coronavirus
  • “Eligible Business” –
    • Air carrier
    • US business that has not otherwise received adequate economic relief under this Act
  • “Employee” –
    • Same meaning as under section 2 of the NLRA
    • Includes any individual employed by an employer subject to the Railway Labor Act
  • “Equity Security; Exchange” – both have the same meanings as set forth in Section 3(a) of the Securities Exchange Act
  • “Municipality” –
    • A political subdivision of a State, and
    • An instrument of a municipality, a State, or a political subdivision of a State
  • “National Securities Exchange” – an exchange registered as an exchange under section 6 of the Securities Exchange Act
  • “Secretary” – Secretary of the Treasury or his designee
  • “State” –
    • Any of the States
    • District of Columbia
    • Any of the territories or possessions of the US
    • Any bi-State or multi-State entity
    • Any Indian Tribe

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Emergency Relief and Taxpayer Protections

  • The Secretary is authorized to make loans, loan guarantees, and investments in financial support of eligible businesses, States, and municipalities that do not, in the aggregate, exceed $500 B, as well as subsidy amounts for such loans and guarantees.
  • Support shall be made available as follows:
    • Not more than $25B for loans and loan guarantees for passenger air carriers, eligible  businesses certified under part 145 of Title 14, CFR, and approved to repair, replace or overhaul services, and ticket agents
    • Not more than $4B for cargo air carriers
    • Not more than $17B for businesses critical to maintaining national security
    • Not more than $454B, and amount available in preceding lines, that are not used as provided under those provisions, shall be available for loans, loan guarantees and investments for programs or facilities established by the BOG of the Federal Reserve System to provide liquidity to the system that supports eligible businesses, States, and municipalities by:
      • Purchasing debt obligations or similar interests from the issuers
      • Purchasing obligations on the secondary market
      • Making loans or other advances secured by collateral
  • Financial support shall be made on terms and conditions deemed appropriate by the Secretary and at a rate deemed appropriate based upon the risk and current average yield on outstanding marketable obligations of the US of comparable maturity.
  • As soon as possible, but not later than 10 days after enactment of the Act, Secretary shall publish procedures for application and minimum requirements
  • Secretary may enter into loan agreements if the Secretary determines:
    • The applicant is eligible
    • The obligation is prudently incurred
    • Loan or guarantee is sufficiently secured or is at a rate that –
      • Reflects the appropriate risk, and
      • is not less than an interest rate based on market conditions for comparable obligations prevalent prior to the Covid 19 outbreak
    • Duration of the loan is not more than 5 years
    • The agreement provides that, until 12 months following the date that the loan is no longer outstanding, neither the business nor any affiliate may purchase an equity security listed on a national securities exchange of the eligible business or any parent of the eligible business, except to the extent required by a contract in effect prior to the effective date of the Act.
    • The agreement provides that, until 12 months following the date that the loan is no longer outstanding, the business shall not pay dividends or make other capital contribution with respect to common stock of the business
    • Until September 2020, the business must maintain its March 24, 2020 employment levels
    • The agreement must include certification that the business is organized under the laws of the US and maintains significant operations here in the US, such that a majority of its employees are US-based
    • The business must have incurred losses such that continued operations are jeopardized as determined at the Secretary’s discretion
  • Provides for a “direct loan” meaning a loan under a bilateral loan agreement that:
    • Is entered into directly with an eligible business as borrower and
    • Is not part of a syndicated loan originated by a financial institution
  • Direct loans can only be made if the eligible applicant agrees that:
    • The agreement provides that, until 12 months following the date that the loan is no longer outstanding, The agreement provides that, until 12 months following the date that the loan is no longer outstanding, neither the business nor any affiliate may purchase an equity security listed on a national securities exchange of the eligible business or any parent of the eligible business, except to the extent required by a contract in effect prior to the effective date of the Act.
    • The agreement provides that, until 12 months following the date that the loan is no longer outstanding, the business shall not pay dividends or make other capital contribution with respect to common stock of the business
    • The business must comply with the limitations in  Section 4004.
    • The Secretary may waive certain restrictions with respect to a program or facility if it is determined to be in the interest of the federal government.
    • Section 13 of the Federal Reserve Act shall apply to any loan made to a program or facility
    • The agreement must include certification that the business is organized under the laws of the US and maintains significant operations here in the US, such that a majority of its employees are US-based
  • Assistance for mid-sized business may include a program or facility that provides financing to banks and other lenders that make direct loans to businesses and nonprofits with between 500 and 10,000 employees:
    • Loans subject to not higher than 2% annual interest rate
    • No principal or interest due for the first 6 months
      • Borrower must certify that the economic conditions necessitate the loan
      • Funds will be used to retain 90% of borrower’s workforce at full compensation until September 2020

Section 4004 – Requires that eligible businesses can only receive a loan or guarantee if they agree to certain employee compensation limitations, namely those at the highest compensation levels

Section 4005 – Secretary of Transportation can require that carriers receiving loans maintain scheduled air service.  In deciding whether to do so, Secretary must consider several criteria small communities and health care needs.

Section 4006 – Secretaries of Treasury and Transportation shall coordinate.

Section 4007 – Suspends certain aviation excise taxes, including transportation by air and use of kerosene, until January 1, 2021.

Section 4008

  • Amends Dodd-Frank in certain provisions to facilitate the provisions of the Act.
  • Credit unions allowed to increase share insurance coverage, which shall then terminate on December 31, 2020.

Section 4009 – Suspends Government in the Sunshine for meetings until December 31, 2020, for Federal Reserve Board.

Section 4010 – Provides for hiring flexibility at least until the end of the crisis or December 31, 2020, for the SEC, Housing and Urban Development, Commodity Futures Trading Commission, as necessary to respond to the current crisis.

Section 4011 – Amends provisions of the Financial Stability Act to facilitate the Act, and waives the lending limit for certain institutions and allows the Comptroller to exempt transactions to the extent that it would be in the public interest.  Provisions terminate December 31, 2020.

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Relief for community banks

Provides relief for community banks including:

  • an interim rule setting the Community Bank Leverage Ratio at 8 percent;
  • providing a grace period for banks that fall below the Ratio
  • Effective until December 31, 2020

Definitions

  • Defines “appropriate Federal banking agency” consistent with the same term in the Economic Growth, Regulatory Relief, and Consumer Protection Act (which defines the term consistent with section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813).
  • Provides that “Community Bank Leverage Ratio” and “qualifying community bank” have the same meanings as those terms in the Economic Growth, Regulatory Relief, and Consumer Protection Act, which defines the terms as follows:
    • Community bank leverage ratio. The term “Community Bank Leverage Ratio” means the ratio of the tangible equity capital of a qualifying community bank, as reported on the qualifying community bank’s applicable regulatory filing with the qualifying community bank’s appropriate Federal banking agency, to the average total consolidated assets of the qualifying community bank, as reported on the qualifying community bank’s applicable regulatory filing with the qualifying community bank’s appropriate Federal banking agency.
    • Qualifying community bank
      • (A) Asset threshold: The term “qualifying community bank” means a depository institution or depository institution holding company with total  consolidated assets of less than $10,000,000,000.
      • (B) Risk profile: The appropriate Federal banking agencies may determine that a depository institution or depository institution holding company (or a class of depository institutions or depository institution holding companies) described in subparagraph (A) is not a qualifying community bank based on the depository institution’s or depository institution holding company’s risk profile, which shall be based on consideration of:
        • off-balance sheet exposures;
        • trading assets and liabilities;
        • total notional derivatives exposures; and
        • such other factors as the appropriate
        • Federal banking agencies determine appropriate.
  • Interim Rule – Requires the Federal banking agencies to issue an interim final rule that, for purposes of the Economic Growth, Regulatory Relief, and Consumer Protection Act:
    • The Community Bank Leverage Ratio is 8 percent;
    • A qualifying bank that falls below that ratio shall have a reasonable grace period to satisfy that Community Bank Leverage Ratio.
  • The interim rule shall be effective from the date that the Federal banking agencies issue the interim rule until either the termination of the national emergency concerning the Covid-19 outbreak, or December 31, 2020.
  • During any grace period allowed a bank that falls below the leverage ratio, a qualifying community bank shall continue to be treated as such, and presumed to satisfy the capital and leverage requirements of Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act.

Section 4013 – Provides relief from troubled debt restructurings for the period March 1, 2020 through December 31, 2020, whereby a financial institution may elect to:

  • Suspend GAAP accounting for loan modifications that would otherwise be considered troubled
  • Suspend any determinations that a loan modification is “troubled debt restructuring”
  • Will not adversely impact the credit of a borrower

Section 4014 – Provides optional temporary relief from current expected credit losses, such as relief from the CECL standards, for non-insured depository institutions, bank holding companies or affiliates such that they are not required to comply with FASB accounting update 2016-13 until the crisis ends or December 31, 2020.

Section 4015 – Provides that restrictions in the Emergency Stabilization Act of 2008 shall not apply through December 31, 2020.  Upon expiration, the Treasury shall reimburse funds used for the Treasury Money Market Funds Guaranty Program.

Section 4016 – Provides temporary provisions for credit unions to relax/amend requirements as to extending credit.  Includes clarification that the credit union Board shall not approve extensions exceeding 16 times the subscribed capital stock and surplus of the Facility through December 31, 2020.

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Temporary Credit Union Provisions

General provisions:

  • Amends Section 302(1) of the Federal Credit Union Act (“FCUA”) to strike the phrase “primarily serving natural persons” which precedes subparagraph (A) thereof.
  • The membership criteria of the FCUA is amended to strike the phrase “all those credit unions” from Section 304(b)(2), and insert instead the phrase “such credit unions as the Board may in its discretion determine”. 
  • Amends Section 306(a)(1) of the FCUA by striking the phrase “the intent of which is to expand credit union portfolios” and to insert instead the phrase “without first having obtained evidence from the applicant that the applicant has made reasonable efforts to first use primary sources of liquidity of the applicant, including balance sheet and market funding sources, to address the liquidity needs of the applicant”. 
  • Adds language to the Powers of the Board, Section 307(a)(4)(A) of the FCUA to specify that the total face value of obligations extended shall not exceed 16 times the subscribed capital stock and surplus of the Facility for the period beginning on the date of the enactment of the Act and ending on December 31, 2020.
  • As currently (pre-Act) set forth in the FCUA, the specified provisions provide as follows:

Section 302(1) – (1) ‘‘liquidity needs’’ means the needs of credit unions primarily serving natural persons for—

  • (A) short-term adjustment credit available to assist in meeting temporary requirements for funds or to cushion more persistent outflows of funds pending an orderly adjustment of credit union assets and liabilities;
  • (B) seasonal credit available for longer periods to assist in meeting seasonal needs for funds arising from a combination of expected patterns of movement in share and deposit accounts and loans; and
  • (C) protracted adjustment credit available in the event of unusual or emergency circumstances of a longer term nature resulting from national, regional or local difficulties.

Section 304(b) – (b) A credit union or group of credit unions, primarily serving other credit unions, may be an Agent member of the Facility by

  • (1) obtaining the approval of the Board;
  • (2) subscribing to the capital stock of the Facility in an amount not less than one-half of 1 per centum of the paid-in and unimpaired capital and surplus of all those credit unions which primarily serve natural persons, which are members of such credit union or of any credit union comprising such credit union group, and which are not regular members;
  • (3) agreeing to comply with rules and regulations the Board shall prescribe with respect to, but not limited to, management quality, asset and liability safety and soundness, internal operating and control practices and procedures, and participation of natural persons in the affairs of such credit union or credit union group; and
  • (4) agreeing to submit to the supervision of the Board which shall include, but not be limited to, reporting requirements and periodic unrestricted examinations.

Section 306(a)

  • (1) A member may apply for an extension of credit from the Facility to meet its liquidity needs. The Board shall approve or deny any such application within five working days after receiving it. The Board shall not approve an application for credit the intent of which is to expand credit union portfolios.
  • (2) The Board may advance funds to a member on terms and conditions prescribed by the Board after giving due consideration to creditworthiness.
  • (3) The Board shall not advance funds for the benefit of a credit union whose share or deposit accounts are insured by a State share or deposit guaranty credit union, insurance corporation, or guaranty association, without consultation with the appropriate State share or deposit guaranty credit union, insurance corporation, or guaranty association.

Sunset

  • Effective December 31, 2020, the changes to Sections 302(1), 304(b)(2), and 306(a)(1) of the FCUA revert as follows:
    • “primarily serving natural persons” is reinserted in 302
    • “such credit unions as the Board may in its discretion determine” is stricken and replaced with “all those credit unions”.
    • “the intent of which is to expand credit union portfolios”  replaces the phrase “without first having obtained evidence from the applicant that the applicant has made reasonable efforts to first use primary sources of liquidity of the applicant, including balance sheet and market funding sources, to address the liquidity needs of the applicant”. 

Section 4017 – Provision waives sections of the Defense Production Act temporarily, which enables increased access to material necessary for national security and pandemic recovery for a limited time.

Section 4018 – Establishes a special Inspector General for Pandemic Recovery within the Department of the Treasury to manage loans and financial obligations under the Act.

Section 4019 – Addresses conflicts of interest, providing that covered entities are not eligible for transactions under Section 4003.

Section 4020 – Establishes a Congressional Oversight Committee that will monitor the Treasury and Reserve Board’s activities under the Act, will submit reports on same to Congress on implementation of the Act.  The Committee can enter contracts and take actions necessary to fulfill its obligations.

Section 4021  – Provides for Credit Protection during the Covid-19 crisis for the period January 1, 2020 through the end of the crisis, which loosens criteria for considering a credit obligation “current.”

Section 4022 – Establishes a foreclosure moratorium for various federally-backed mortgage loans and expands ability of borrowers under such loan programs to seek forbearance.

Section 4023 – Establishes a forbearance process for residential mortgage loan payments under federally-backed loans for multifamily properties.   Provides for renter protections during the period to prevent eviction or charging of late fees by borrowers who have obtained forbearance.

Section 4024 – Establishes a moratorium on eviction filings on a residential lease for property covered by the Violence Against Women Act of 1994, a rural housing voucher under the Housing Act, or a federally-backed mortgage or multifamily mortgage loan.

Section 4025 – Protects collective bargaining agreements by prohibiting the conditioning of any loan under the act upon requirement that the air carrier or eligible business enter into negotiations with the certified bargaining representative of a craft or class of employees.

Section 4026 – Requires reporting on transactions conducted under the Act.

Section 4027 – Appropriates $500B to carry out the Act.  On January 1, 2026, any funds remaining shall be transferred to the general fund of the Treasury.

Section 4028 – Provides the rules of construction for the Act to ensure the Secretary can provide relief as contemplated and in the interest of the Federal Government.

Section 4029 – Except as provided in certain provisions, the Act sunsets on December 31, 2020.

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Air Carrier Worker Support

Definitions

  • Airline catering employee: means an employee who performs airline catering services
  • Airline catering services: means preparation, assembly, or both, of food, beverages, 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;
  • Contractor: means –
    • Person(s) that performs, under contract with a passenger air carrier conducting operations under part 121 of title 14, Code of Federal Regulations:
      • Catering functions; or
      • functions on airport property that directly relate to air transportation of people, property, or mail.
        (including airport ticketing and check-in functions; ground-handling of aircraft; or aircraft cleaning and sanitization functions and waste removal)
    • Subcontractors that performs such functions
  • Employee: means an individual, other than a corporate officer, who is employed by an air carrier or a contractor
  • Secretary: means the Secretary of the Treasury

Pandemic relief for aviation workers

  • The Secretary of the Treasury shall provide financial assistance that shall exclusively be used for the continuation of payment of employee wages, salaries, and benefits to:
    1. passenger air carriers, in an aggregate amount up to $25,000,000,000;
    2. cargo air carriers, in the aggregate amount up to $4,000,000,000;
    3. contractors, in an aggregate amount up to $3,000,000,000.
  • The Secretary may use $100,000,000 of the funds made available under section 4120 for costs and administrative expenses associated with providing financial assistance under this subtitle.

Procedures for providing payroll support

  • The Secretary shall provide financial assistance to:
    1. an air carrier in an amount equal to the salaries and benefits reported to the Dept. of Transportation, for the period from April 1, 2019, through September 30, 2019
    2. an air carrier that does not transmit reports under such part 241 of title 14, CFR, using sworn financial statements during the period from April 1, 2019, through September 30, 2019
    3. a contractor, in an amount that the contractor certifies, that such contractor paid the employees during the period from April 1, 2019, through September 30, 2019
  • Financial assistance shall have terms and conditions, including requirements for audits and the clawback of any financial assistance provided upon failure to honor the assurances specified in section 4114.
  • Secretary shall publish expedited procedures for air carriers and contractors to submit requests for financial assistance within 5 days after the date of enactment of this Act.
  • Within 10 days of enactment of this Act, the Secretary shall make initial payments to air carriers and contractors that submit requests for financial assistance approved by to the Secretary.
  • The Secretary shall determine an appropriate method for timely distribution of payments to for financial assistance from any funds remaining available after providing initial financial assistance payments.
  • The Secretary shall have the authority to reduce, on a pro rata basis, the amounts due to air carriers and contractors in order to address any shortfall in assistance that would otherwise be provided.
  • The Inspector General of the Department of the Treasury shall audit certifications made under subsection (a).

Required Assistance

  • To be eligible for financial assistance, an air carrier or contractor shall enter into an agreement with the Secretary that the air carrier or contractor shall:
  • Refrain from conducting involuntary furloughs or reducing pay rates and benefits until September 30, 2020;
  • Through September 30, 2021, ensure that neither the air carrier or contractor may, in any transaction, purchase an equity security of the air carrier or contractor or the parent company of the air carrier or contractor that is listed on a national securities exchange;
  • Through September 30, 2021, ensure that the air carrier or contractor shall not pay dividends, or make other capital distributions, with respect to the common stock (or equivalent interest) of the air carrier or contractor; and
  • Meet the requirements of sections 4115 and 4116.
  • The Secretary of Transportation is authorized to require an air carrier that is provided financial assistance, to maintain scheduled air transportation service to ensure services to any point served by that carrier before March 1, 2020. (The Secretary of Transportation shall consider the air transportation needs of small and remote communities and the need to maintain well-functioning health care supply chains, including medical devices and supplies, and pharmaceutical supply chains.)
  • The Secretary of Transportation’s authority provided shall terminate on March 1, 2022.

Protection of collective bargaining agreement

  • Neither the Secretary, nor any other federal agency, shall condition the issuance of financial assistance on an air carrier’s or contractor’s implementation of measures to enter into negotiations with the certified bargaining representative regarding pay or other terms and conditions of employment.
  • With respect to an air carrier or contractor to which financial assistance is provided under this subtitle, this section shall be in effect with respect to the air carrier or contractor beginning on the date on which the air carrier or contractor is first issued such financial assistance and ending on September 30, 2020.

Limitation on certain employee compensation

  • The Secretary may only provide financial assistance after such carrier or contractor enters into an agreement with the Secretary which provides that, during the 2-year period (March 24, 2020 to March 24, 2022), no officer or employee whose total compensation exceeded $425,000 in calendar year 2019 (other than an employee whose compensation is determined through an existing collective bargaining agreement entered into prior to enactment of this Act):
    • will receive total compensation which exceeds the total compensation received by the officer or employee from the air carrier or contractor in calendar year 2019;
    • will receive severance pay or other benefits upon termination of employment which exceeds twice the maximum total compensation received by the officer or employee in calendar year 2019; and
    • no officer or employee of the eligible business whose total compensation exceeded $3,000,000 in calendar year 2019 may receive during any 12 consecutive months of such period total compensation in excess of the sum of:
    • $3,000,000; and
    • 50 % of the excess over $3,000,000 of the total compensation received by the officer or employee from the eligible business in calendar year 2019.
  • In this section, the term ‘‘total compensation’’ includes salary, bonuses, awards of stock, and other financial benefits provided by an air carrier or contractor to an officer or employee of the air carrier or contractor.

Tax payer protection
The Secretary may receive warrants, options, preferred stock, debt securities, notes, or other financial instruments issued by recipients of financial assistance under this subtitle which, in the sole determination of the Secretary, provide appropriate compensation to the Federal Government for the provision of the financial assistance.

Reports

  • (a) REPORT.— By November 1, 2020, the Secretary shall submit a report on the financial assistance provided to air carriers and contractors including a description of any financial assistance provided.
  • (b) REPORT UPDATE.—Not later than the last day of the 1-year period following the date of enactment of this Act, the Secretary shall update and submit the report described in subsection (a).

Coordination
Secretary shall coordinate with the Secretary of Transportation.

Direct appropriation
Notwithstanding any other provision of law, there is appropriated, out of amounts in the Treasury not otherwise appropriated, $32,000,000,000 to carry out this subtitle.

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Important Note Regarding The Cares Act

The CARES Act was signed into law on March 27, 2020 and the U.S. Small and the U.S. Small Business Administration (“SBA”), the U.S. Department of Treasury (“Treasury”), and other federal regulators, as well as states, will issue new rules and detailed guidance in the days and weeks after the Act becomes law. Accordingly, the process of pursuing the assistance provided by the Act may require efforts different from and additional to those discussed in this interim Alert. You should not rely on the information in this Alert without consulting a Gunster attorney.

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The provisions provided on this webpage are not legal advice.  For specific legal advice related to the CARES Act, contact Jonathan Osborne.