On Friday, March 27, 2020, the U.S. House of Representatives voted to approve the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) submitted by the Senate, and President Trump just signed the bill.The bill provides for $2.2 trillion in emergency aid to ease the financial impact of the COVID-19 crisis.
Among other things, the bill provides $500 billion in loans to stricken industries, expands jobless benefits, and provides for direct payments to millions of Americans. A summary of each of the provisions of the bill can be found here.
Below is a summary of some of the provisions most relevant to the business community, and we invite you to visit the Firm’s Coronavirus Resource Center for a more complete analysis of key features of the bill:
How the $2.2 Trillion Is Allocated
- $500 billion in assistance to businesses, states and municipalities
- $349 billion in assistance to small businesses and 501(c )(3) nonprofits
- $340 billion in assistance to hospitals and public transit, among other facilities
- $301 billion in assistance to families
- $250 billion to expand unemployment benefits
- $221 billion in business tax benefits
- $150 billion in direct grants to states
- $32 billion in grants for airline industry wages
- Banks can temporarily suspend requirements under US Generally Accepted Accounting Principles (or GAAP) for loan modifications related to the COVID-19 crisis, and suspend any such determination regarding those troubled consumer loans;
- Banks, bank holding companies, and their affiliates are temporarily not required to comply with FASB’s current expected credit losses, or CECL, methodology for estimating allowances for credit losses;
- A new, temporary exception is created from bank lending limits for approved loans and extensions of credit by a bank to any nonbank financial company, and the OCC is granted the temporary authority to issue orders exempting any transaction from the lending limits;
- The FDIC is authorized to establish a temporary debt guarantee program to guarantee obligations of solvent insured depository institutions and depository institution holding companies (and their affiliates), an approach used under the Dodd-Frank Act. The Dodd-Frank Act language is amended to provide that guarantees of deposits held by insured depository institutions in noninterest-bearing transaction accounts may be treated as a debt guarantee program;
- Qualifying community banking organizations are subject to a less restrictive maximum leverage ratio to encourage lending;
- Banks and other lenders may make direct loans to eligible US mid-sized businesses through a specific facility/program that the US Treasury Secretary must implement as part of the $500 billion appropriation.
Private Equity Funds
- Private equity-owned businesses are not specifically barred from receiving assistance; however, these businesses will generally not be able to access the $349 billion in payroll protection loans and grants for small businesses, due to the rules requiring the size of the business to be calculated in the aggregate with its affiliates (with certain exceptions, including businesses in the accommodation and food services sector, franchises, and businesses receiving financing from a licensed small business investment company).
- In general, subject to the affiliation rules noted above, businesses with up to 500 employees (with a higher threshold applying in the case of certain industries, such as oil and gas extraction) can apply for the new payroll protection loans through the Small Business Administration.
- These loans may be forgiven to the extent spent on payroll (up to $100,000 per employee on an annual basis), mortgage interest, and rent and utilities payments during the two months following loan origination (subject to maintaining workforce and wage levels);
- The loans are subject to a payroll-based cap (2.5 times average monthly payroll), not to exceed $10 million;
- The 500 employee threshold is determined on a per-location basis for businesses in the accommodation and food services sector.
Airline and National Security-Related
- For passenger airlines: $25 billion in direct funding for worker salaries and benefits, and $25 billion in loans and loan guarantees;
- For passenger airline contractor workers (e.g., catering, baggage loading): $3 billion in direct funding;
- For cargo airlines: $4 billion in direct funding for worker salaries and benefits, and $4 billion in loans and loan guarantees;
- For “businesses critical to maintaining national security,” e.g., airline manufacturers, defense contractors and their suppliers: $17 billion in loans and loan guarantees;
- In exchange for these grants or loans, airlines and manufacturers must agree not to: furlough, lay off or reduce pay for employees until September 30; or buy back shares or pay dividends. They must also agree to limits on executive compensation.
- Pharmaceutical companies and academic groups developing drugs and vaccines against COVID-19: adds $27 billion to an emergency fund signed earlier in March;
- The FTC and DOJ recently issued a joint statement suggesting that the antitrust enforcement agencies may show deference to limited competitor collaboration that might otherwise attract antitrust scrutiny, when necessary to address COVID-19-related issues (see 'Competitor Collaborations: Competition Agencies Respond to a Global Pandemic')
- Requires drug manufacturers and companies that make active pharmaceutical ingredients to increase reporting of potential shortages;
- Requires companies that make respirators and other medical devices to report supply chain interruptions.
Hotels and Restaurants
- Hotels and restaurants can access the $349 billion in payroll protection loans and grants for small businesses so long as each location has no more than 500 employees.
- Small Business Act “affiliate” restrictions—usually requiring affiliates to be counted together for purposes of SBA loan eligibility—are waived to allow further access to small business loans.
- No specific earmarked assistance, other than the general ability for eligible businesses to get loans.
- Hundreds of billions of dollars in loans to manufacturers.
- The bill corrects an error in the 2017 Tax Cuts and Jobs Act that required retailers to expense improvements over 39 years. They can now expense improvements in the first year and can be refunded for their overpaid taxes over the past two years. The new $349 billion payroll protection loans may also be available if they satisfy the expanded small business criteria.
Loans, Taxes & Finance
- The U.S. Department of the Treasury will approve all industry grants and loans;
- They will further be subject to oversight by an inspector general and a congressional oversight board.
- Corporations can claim refunds by applying losses from 2018, 2019 or 2020 to past years' profits;
- Employers can defer paying 2020 payroll taxes to 2021 and 2022;
- Employers can claim a tax credit equal to 50% of payroll for retaining employees;
- This is limited to $10,000 per employee per quarter;
- Only applies to employers with over 100 employees, which have been limited or closed due to government actions.
- Individuals: extends repayment time frame from five years to seven years and do not have to use stimulus checks to repay debt;
- Corporations: amends the Small Business Reorganization Act to increase the eligibility threshold to file under subchapter V of the US Bankruptcy Code to businesses with less than $7.5 million of debt.
- Servicers of federally backed mortgages must grant up to 360 days forbearances to borrowers and are prohibited from initiating foreclosure proceedings for 60 days starting on March 18, 2020;
- Owners of multifamily properties can request up to 90 days forbearances from servicers. A multifamily owner that receives a forbearance cannot evict or charge late fees to tenants for the duration of the forbearance.
- Most US citizens with federal student loans can defer payments until after September 30, 2020, without any interest accruing or incurring penalties.
- Accommodations made by a creditor to a consumer (e.g., agreement to defer payment or accept partial payment, loan modification, forbearance) will not affect the consumer’s credit report during a temporary relief period.
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