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US passenger airlines, cargo air carriers, aviation repair facilities and certain other aviation industry participants severely affected by the COVID-19 pandemic can take advantage of the unprecedented aid available under Title IV of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted on March 27, 2020.
The CARES Act—which provides US$2.2 trillion overall in emergency aid to ease the financial impact of the COVID-19 crisis—will direct US$500 billion in loans, loan guarantees and other investments to adversely impacted industries and will make available an additional US$32 billion in payroll support to aviation workers. A full list of CARES Act funding for specific categories of businesses is available here (PDF).
Here are highlights of funding and benefits available to aviation businesses under the CARES Act.
Liquidity package for US aviation sector
The CARES Act makes available US$46 billion of the US$500 billion liquidity package as direct loans and loan guarantees for the US aviation sector, including:
- Passenger airlines, Part 145 repair facilities and ticket agents - US$25 billion in loans and loan guarantees
- Cargo air carriers - US$4 billion in loans and loan guarantees
- "Businesses critical to maintaining national security" - US$17 billion in loans and loan guarantees
Qualifying aviation businesses that have not otherwise received adequate economic relief under the CARES Act are also eligible for programs and facilities established by the Federal Reserve for purposes of channeling the remaining $454 billion.
On March 30, 2020, the US Treasury Department published procedures for loans to air carriers and other eligible business, and it may provide further guidance in the coming days. Qualifying businesses that wish to take advantage of this aid package should immediately begin assembling a package of financial information. Each loan applicant will be required to submit: the applicant's outstanding debt and debt service; employment levels; financial statements; operations forecasts; use of proceeds; information regarding the applicant's financial needs; and other details.
US$32 billion in payroll support for aviation workers
In addition to the US$500 billion liquidity package, the CARES Act sets aside the following amounts to pay wages, salaries and benefits for aviation workers in the following sectors:
- US$25 billion for passenger air carriers
- US$4 billion for cargo air carriers
- US$3 billion for airline contractors involved in catering, security, ticketing, baggage loading and similar airport functions
The total amount of salaries and benefits that an eligible business paid to its employees during April 1, 2019 through September 30, 2019 will limit the amount of payroll financial assistance it can receive. A summary of the relevant parameters is available here (PDF).
To apply for payroll support, the eligible business must submit a Payroll Support Application Form, which must include a proposal identifying the financial instruments to be issued to the US Treasury Secretary as a means of compensating the US Government for the payroll support. In addition, the eligible business must enter into a Payroll Support Agreement outlining the terms of the payroll support, including but not limited to, compensation limitations, assurances and provisions for clawback of payments. See more below.
Applicants should submit their completed application materials by 5:00pm EDT on April 3, 2020. Applications received after this deadline will be considered but may not receive approval quickly. However, applications must be received by April 27, 2020 to be considered for approval. Processing of initial payments of payroll support should start by April 6, 2020.
Restrictions associated with CARES Act financial relief
In exchange for receiving financial assistance, aviation businesses must agree to accept certain restrictions on their activities. For example:
No dividends or other capital distributions
A business that receives a loan or a loan guarantee may not pay dividends or other capital distributions until one year after it has fully repaid the loan or loan guarantee. A business that receives payroll support may not pay dividends or capital distributions until September 30, 2021.
Limits on stock buybacks
If a business receives a loan or a loan guarantee, neither the business nor its affiliates may repurchase equity securities of the business or its parent company that are listed on a national securities exchange until one year after the loan or loan guarantee has been fully repaid, except as required under an existing contractual obligation. If a business receives payroll support, neither the business nor its affiliates may repurchase equity securities of the business or its parent company that are listed on a national securities exchange through September 30, 2021 (seemingly without exceptions for existing contractual obligations).
No employee furloughs, layoffs or pay reductions
A business that receives a loan or a loan guarantee must maintain its March 24, 2020 employment levels until September 30, 2020, to the extent practicable. In no case may the business reduce its employment levels by more than 10% below its March 24 level. A business that receives payroll support may not conduct involuntary furloughs or reduce pay rates or benefits until September 30, 2020.
The Treasury Department may refuse to provide payroll support payments to air carriers or contractors that have taken or are evaluating any actions to commence bankruptcy or insolvency proceedings.
Limits on executive compensation
Any business that receives a loan or a loan guarantee or payroll support under the CARES Act must agree to certain limits on executive compensation. In particular, no officer or employee of such a business whose total compensation exceeded US$425,000 in 2019 (other than any employee subject to a collective bargaining agreement) may receive:
- total compensation during any 12 consecutive months that exceeds his/her total compensation in 2019 or
- severance pay or other termination benefits in excess of twice his/her total compensation in 2019.
In addition, no officer or employee of such a business whose total compensation exceeded US$3 million in 2019 may receive total compensation during any 12 consecutive months in excess of US$3 million plus 50% of the excess over US$3 million of his/her 2019 total compensation.
If a business receives a loan or a loan guarantee, these restrictions on executive compensation will apply from the date of the loan or loan guarantee until one year after it has been fully repaid. For a business that receives payroll support, these restrictions will apply from March 24, 2020 until March 24, 2022.
"Total compensation" includes salary, bonuses, awards of stock and other financial benefits provided by a business to the relevant officer or employee.
Warrant, equity or debt issued to the US government
If a business obtains a loan or a loan guarantee, it must issue a warrant, an equity interest or a senior debt instrument to the US government. If a business obtains payroll support through the grant provisions, it may be required to issue a warrant or other instrument to the US government to provide appropriate compensation for the provision of financial assistance.
The US Treasury Secretary will set the terms and conditions of such warrants and other instruments. These terms and conditions will be determined soon. The only recent example of a similar US government program is the warrant program established by the US Treasury Department in the 2008 Troubled Asset Relief Program (TARP) and the US government may look to the TARP program for guidance.
In particular, the CARES Act will require that, in connection with loans and loan guarantees:
- Warrants and other equity interests must provide for reasonable participation in equity appreciation by the US Treasury Secretary (and thus benefit US taxpayers), though the US Treasury Secretary will not exercise voting power with respect to any shares of common stock acquired;
- Debt instruments must provide a reasonable interest rate premium to the US Treasury; and
- The US Treasury Secretary must retain the ability to sell, exercise or surrender a warrant or any senior debt instrument.
The CARES Act does not detail specific requirements for the warrants and other equity interests that may be issued in connection with payroll grants.
Federal excise tax holiday
In addition, the CARES Act temporarily repeals all federal excise taxes collected in relation to commercial aviation. Excise taxes typically apply to the transportation of persons (such as ticket taxes), the transportation of property (such as cargo taxes) and purchases of aviation fuel. This tax holiday is not limited to US air carriers. The CARES Act provides that the tax holiday will expire before January 1, 2021.
To learn more about the CARES Act and the impact of COVID-19, visit White & Case's Coronavirus resource center. For other insights relevant to the global aviation industry, please see here.
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