Sweeping legislation to respond to the COVID-19 pandemic was cleared by Congress and signed into law by President Trump on March 27, 2020. The Coronavirus Aid, Relief, and Economic Security Act (“the CARES Act” or “the Act”) authorizes more than $2 trillion to battle COVID-19 and its economic effects, including immediate cash relief for individual citizens, loan programs for small business, support for hospitals and other medical providers, and various types of economic relief for impacted businesses and industries.
A brief overview of the Act follows, with certain key provisions highlighted. Please contact the Reed Smith attorneys listed below for more information about the Act’s provisions, your eligibility for assistance pursuant to the Act, and how we can help you navigate the legal and policy impacts of the COVID-19 pandemic.
Division A—Keeping Workers Paid and Employed, Health Care System Enhancements, and Economic Stabilization
Title I—Keeping American Workers Paid and Employed Act
The Paycheck Protection Program: The Paycheck Protection Program enacted under the CARES Act provides increased loan amounts for eligible small businesses for payroll obligations, emergency grants to cover immediate operating costs, and a mechanism for loan forgiveness where the small business can demonstrate that the loan proceeds were used for payroll and related costs. Title I provides $349 billion for relief during the covered period from February 15, 2020 to June 30, 2020 through a number of changes to the loan programs that currently exist and are administered by the Small Business Administration (SBA).
Small Businesses: So-called Section 7(a) loans are the primary SBA vehicle for providing capital to small businesses. Small businesses1 are defined by the Act to include business concerns, nonprofit organizations, veterans organizations or tribal businesses provided that such entity employs not more than the greater of (i) 500 employees (which includes full time and part time employees) or, if applicable, (ii) the size standard in number of employees established by the SBA for the industry in which such entity operates.
Affiliation Rules: For purposes of meeting the 500 or fewer employees test, the CARES Act generally appears to leave the SBA affiliation rules intact. As a result, the employees of the borrower and its affiliates (domestic and foreign) are aggregated for purposes of the calculation. The CARES Act provides some relief from the affiliation rules for entities in the accommodations and food services industries2 that have more than one physical location, provided that such entity employs fewer than 500 employees per physical location. Franchises approved by the SBA are likewise excluded from the affiliation rules, as are businesses that have received funding from a SBIC (Small Business Investment Company). The application of the affiliation rules is complex and fact-specific. They will be of particular concern to borrowers who are sponsored by private equity, venture capital and similar financial sponsors. The question for such financial sponsors is whether such a borrower is deemed “affiliated” for SBA purposes with its financial sponsor and with the sponsor’s other portfolio companies.
Section 7(a) Borrowers: An eligible recipient applying for a covered loan under the CARES Act must make a good faith certification, that, among other things: (i) the current economic conditions and uncertainty make the loan request necessary to support the recipient’s business operations; (ii) the funds from such covered loan will be used to retain workers, maintain payroll, or make mortgage, lease or utility payments; (iii) the recipient does not have another loan application pending under the CARES Act; and (iv) the recipient has not received amounts under the CARES Act for the same purpose before December 31, 2020 and was in operation as of February 15, 2020.
Section 7(a) Loan Amounts and Provisions: The CARES Act amends the SBA’s Section 7(a) loan program of the SBA. Loan amounts are increased to a maximum $10 million per eligible borrower.3 Both borrower and lender fees for Section 7(a) loans will be waived. A covered loan under the CARES Act may not provide for an interest rate above 4 percent. The CARES Act permits complete deferment of Section 7(a) loan payments for more than six months, but not more than one year. Notably, the CARES Act eliminates any requirement for the borrower to provide collateral or a personal guaranty.
Section 7(a) Lenders: The SBA Administrator and the Secretary of the Treasury have the authority under the CARES Act to make Section 7(a) loans to additional lenders, provided that such additional lenders have the necessary qualifications to process, close, disburse and service such loans made with the guarantee of the SBA. The SBA will reimburse an authorized lender at a rate of (i) 5 percent for loans up to $350,000; (ii) 3 percent for loans between $350,000 and $2,000,000; and (iii) 1 percent for loans over $2,000,000, based on the balance of the financing outstanding at the time of disbursement.
Loan Forgiveness: Any portion of the Section 7(a) loan used to maintain payroll, provided workers stay employed through to the end of June 2020, will be forgiven in an amount equal to the sum of the following costs incurred and payments made during the eight-week period beginning on the date of the origination of a covered loan: (i) payroll costs; (ii) interest payments on mortgages; (iii) covered rent obligations; and (iv) covered utility payments. The amount of forgiveness may not exceed the principal amount made available under the covered loan. Small businesses and other eligible entities will be able to apply if they experienced impacts related to the COVID-19 pandemic between February 15, 2020 and June 30, 2020. Loan forgiveness applies only to Section 7(a) loans and does not apply to EIDLs (discussed below).
Economic Injury Disaster Loans (EIDLs): The Act expands the SBA’s EIDL program. EIDLs are loans available to small business borrowers that have suffered economic injury as a result of a pandemic or other disaster. Eligibility for an EIDL is limited to small business. The small business qualification attributes discussed above for Section 7(a) loans are generally applicable to EIDLs; however, it does not appear that the relief from affiliation rules (such as for borrowers in the accommodation and food services industries) for Section 7(a) loans applies to EIDLs. In addition to being a small business, the EIDL borrower must (i) be located in a declared disaster area; (ii) have suffered “substantial economic injury”4 as a direct result of a declared disaster; and (iii) not own property subject to a federal judgment lien. EIDL amounts are generally limited to $2 million. Personal guaranty requirements are waived for loans of $200,000 and less. The Act does not specify any changes to existing collateral requirements (collateral is generally required for EIDLs of more than $25,000), so it would appear that they continue to apply.
Advances Under EIDL Program: The CARES Act makes available advances of up to $10,000 to cover immediate operating costs of eligible businesses applying for EIDL assistance. The SBA’s authority to provide these grants will terminate on December 31, 2020. These grants do not need to be repaid, even if the EIDL application is ultimately denied.
Use Limitations for Section 7(a) Loans and EIDLs: The proceeds of Section 7(a) loans and EIDLs may only be used for specified purposes – generally limited to employee payroll, continuation of health care benefits to employees on paid leave, health insurance premiums, and other operating costs such as mortgage service, rent and utilities. EIDL proceeds specifically may not be used to refinance existing indebtedness or to pay dividends or other distributions to owners or officers, other than ordinary course compensation.
Bankruptcy: The CARES Act increases the debt ceiling that a company may have and still allows access to the Small Business Reorganization Act of 2019 (“SBRA”), which Congress enacted in 2019 and became effective February 19, 2020. Under the CARES Act, a business may now have debt up to $7,500,000 (up from $2,725,625) and still be eligible for filing bankruptcy under SBRA. The debt limit increase is temporary and returns to the original $2,725,625 one year after the enactment of the CARES Act.
For consumers, the CARES Act increases the rights of consumer debtors by excluding payments to individual debtors related to the COVID-19 pandemic from “current monthly income” for the purposes of determining eligibility for filing bankruptcy, as well as from the calculation of “disposable income” in chapter 13 bankruptcy cases. Debtors that currently are in chapter 13 cases may modify their plans to include plan extensions for up to seven years from the time initial payment was due (increased from the regular maximum length for a chapter 13 plan of five years). These consumer-related amendments expire one year after enactment.
Regulatory Guidance: The SBA is required to issue regulations implementing the statutory requirements of Title I of the CARES Act by April 13, 2020. Such regulations may provide additional clarity on the issues discussed above, including the application of the affiliation rules. These regulations will not be subject to any notice and comment requirements.