Locke Lord QuickStudy: What We Know and What is Ahead: COVID-19 Financial Assistance
As of the date of this QuickStudy, although it is anticipated that Congress will increase the federal funds allocated to the Paycheck Protection Program (the “PPP”) by the Coronavirus Preparedness and Response Supplemental Appropriations Act (“CARES Act”), the original funds so allocated have been exhausted and it is unclear when additional funds will be allocated to the PPP. If future additional funds are allocated, they may be accompanied by additional restrictions and regulations. More information on the PPP can be found in Locke Lord QuickStudy: Saving Our Small Businesses: Congress Reaches Agreement on New Forgivable Paycheck Protection Loans to Small Businesses.
Although PPP loan applications are no longer being processed, companies negatively impacted by COVID-19 may have other options for financial assistance including (i) the Employee Retention Credit, (ii) the Economic Injury Disaster Loan (assuming there are additional funds allocated by Congress), (iii) the Main Street Lending Program, and (iv) Direct Loans to and Investments in Investment Grade Companies.
1. EMPLOYEE RETENTION CREDIT:
The CARES Act provides for a non-governmental business to receive an Employee Retention Credit (“Retention Credit”). The Retention Credit is a fully refundable payroll tax credit equal to 50% of qualified wages. Companies that qualify for the Retention Credit may, under certain circumstances, receive an advance under the Retention Credit.
Eligibility:
- Companies are eligible for the Retention Credit, if:
- Their operations are fully or partially suspended due to government action as a result of COVID-19; or
- They have gross receipts for any calendar quarter below 50% of the comparable calendar quarter in 2019.
- Companies with more than 100 employees may receive the Retention Credit, but only for those wages paid to employees for not providing services due to the Company’s suspension of operations or gross receipts decline during the quarter. Note, the IRS has not issued guidance at this point regarding:
- how to calculate the equivalent wage limitation for wages for employees who are working on a reduced (such as 2 days per week instead of 5 days per week) or rotation schedule (such as one week on, one week off) but are paid during the week off even though services are not provided.; or
- how to treat employees who are working a partial day of service schedule (such as 4 hours per day, instead of 8 hours per day) but are paid based on the full schedule even though services are not provided for part of the time.
- Companies with less than 100 employees may receive the Retention Credit for all qualified wages paid to employees during a calendar quarter, whether they worked or not, during the quarter.
Affiliation Rules:
- In order to determine number of employees a Company has affiliation rules under IRC Sections 52(a) and (b) and IRC Sections 414(m) and (o) are applied.
- The SBA affiliation rules and regulations do not apply to the Retention Credit.
Amount of Retention Credit:
- 50% of the qualified wages paid to an employee during the calendar quarter, up to $10,000, for a maximum Retention Credit of $5,000 per employee.
- Wages taken into account are not limited to payments made directly to the employee, but also include a portion of the cost of employer provided health care (not including sick-leave or family-leave under FFCRA).
- The Retention Credit is credited against the employer’s portion of social security taxes (“Covered Tax”) under section 3111(a) of the Internal Revenue Code.
- If the Company does not owe employment taxes in the full amount of the Retention Credit, the Company may get an advance equal to the difference between the amount owed in employment taxes and the amount of the Retention Credit by filling an IRS Form 7200.
- Retention Credit is only available for “qualified wages” paid between March 13, 2020 and December 31, 2020.
Please Note:
- The Retention Credit and the PPP loan are mutually exclusive. THE RETENTION CREDIT IS NOT AN OPTION FOR THOSE COMPANIES WHO HAVE ALREADY RECEIVED A PPP LOAN.
- The Retention Credit is an option for companies that did not receive a PPP loan, including companies with over 500 employees.
- Since the Retention Credit is a tax credit, there isn’t a “bucket” of money that can run out so it is available to any company in the amounts specified above. Additional business tax considerations are discussed in Locke Lord Quick Study: UPDATE: CARES Act Guide: Overview of Key Business Tax Provisions.
- Employers are able to defer social security tax deposits and payments. Detailed information regarding such deferral can be found in the Locke Lord Quick Study: CARES Act Guide: Overview of IRS Guidance Regarding Deferral of Employment Tax Deposits and Payments.
2. ECONOMIC INJURY DISASTER LOANS:
If additional funds are allocated, assuming the rules and regulations remain substantially the same, the Economic Injury Disaster Loan (“EIDL”) should once again be available for small businesses from the SBA. Some of the rules for EIDLs have been relaxed for companies affected by COVID-19 and allow for a portion of the low-interest EIDL to be forgiven.
Eligibility:
- Small business and non-profits with less than 500 employees. SBA affiliation rules will apply, a summary of SBA affiliation rules in the context of the CARES Act can be found in Locke Lord QuickStudy: SPECIAL ALERT: Affiliate Rule Guidance Issued for the Paycheck Protection Program.
- Note that, unlike the PPP, there is no waiver of the SBA affiliation rules for registered franchises, companies with an NAICS code beginning with 72 or companies who have funding from an SBIC fund.
Amount of Loan:
- Up to $2 million, with the first $10,000 advance turning into a grant if used for covered expenses.
Please Note:
- EIDL are being issued directly by the SBA. Banks do not participate in this program.
- EIDL can pay expenses that are prohibited by the PPP loan.
- Companies can receive both an EIDL and PPP loan but Companies may not “double dip” and use the funds to cover the same costs twice. If a company receives a PPP loan after it has received an EIDL, it must disclose this loan in its PPP application.
- Companies may have to provide collateral support and guarantees for an EIDL, whereas the PPP is unsecured.
- Additional information on EIDL under the CARES act can be found in Locke Lord QuickStudy: Saving Our Small Businesses: CARES Act Expands Economic Injury Disaster Loan Program to Provide Additional Financial Relief to Small Businesses.
3. MAIN STREET LENDING PROGRAM:
There are two new programs yet to be implemented. Both are lending programs and, unlike the PPP, not forgivable. Additional information regarding the Main Street Lending program, including a summary of open questions can be found in Locke Lord QuickStudy: Help for Main Street: Treasury Department and Federal Reserve Announce Main Street Lending Facilities for Small and Mid-Sized Businesses (including Nonprofits).
These two new programs are:
(a) Main Street New Loan Facility (“MSNLF”)
(b) Main Street Expanded Loan Facility (“MSELF”)
Eligibility:
- A U.S. business with significant operations, and a majority of its employees based, in the United States may choose to participate in either the MSNLF or MSELF if that company has up to
- 10,000 employees, OR
- $2.5 billion in annual revenues in 2019
Summary Terms of the Loans:
- A loan made under the MSNLF is a new unsecured term loan made to a qualifying company.
- A loan made under the MSELF is an upsized term loan tranche of a qualifying company’s existing term loan facility (existing prior to April 8, 2020) and may be secured or unsecured, depending on terms of the existing facility.
- Both are limited to terms not to exceed four (4) years;
- Both allow deferral of principal and interest for one (1) year;
- Both provide for adjustable interest rate of SOFR plus 250 to 400 bps;
- Both permit prepayment without penalty;
- Both require a minimum borrowing of $1 million;
- MSELF maximum loan amount is the LOWEST of:
- $150 million;
- 30% of the borrower’s existing outstanding and committed but undrawn bank debt; or
- Six (6) times the borrower’s 2019 earnings before interest taxes depreciation and amortization (EBIDTA), less the borrower’s existing outstanding and committed but undrawn debt.
- MSNLF maximum loan amount is the LESSER of:
- $25 million; or
- Four (4) times the borrower’s 2019 earnings before interest taxes depreciation and amortization (EBIDTA), less the borrower’s existing outstanding and committed but undrawn debt.
Fees:
- Lender receives, under either the MSELF or the MSNLF, 100 bps on the principal amount of the loan from the Company.
- For the MSELF, Lender pays a facility fee of 100 bps to the common special purpose vehicle (the “SPV”) established by a Federal Reserve Bank for the purpose of purchasing participations in the loans. This fee may be passed through to the borrower.
- Lenders will receive another 25 bps for loan servicing from the SPV.
Additional Requirements and Restrictions: Additional requirements of the MSELF and MSNLP include:
- Proceeds from the MSELF or the MSNLP will not be used to repay or refinance a borrower’s pre-existing loans.
- A borrower may not voluntarily repay debt of equal or lower priority, except for mandatory principal payments;
- Neither a lender nor a borrower may cancel or reduce outstanding lines of credit.
- Financing must be necessary due to exigent circumstances presented by COVID-19.
- The borrower must make reasonable efforts to maintain its payroll and retain its employees during the term of any loan.
- The borrower must follow restrictions with regard to compensation, stock repurchase and capital distribution requirements, a summary of those restrictions can be found in Locke Lord QuickStudy: Help for Mid-Sized Businesses: Congress Provides for Implementation of New Direct Loan Program to Eligible Mid-Size Borrowers in CARES Act.
4. DIRECT LOANS TO AND INVESTMENTS IN INVESTMENT GRADE COMPANIES
The Board of Governors of the Federal Reserve has also announced several new programs to provide direct loans to U.S. companies headquartered in the United States with material operations in the United States. Companies that are eligible for these direct loans cannot be expecting relief under other programs and must have investment grade ratings of at least BBB-/Baa3 from two nationally recognized rating agencies. These new programs include the following:
- Primary Market Corporate Credit Facility (“PMCCF”) which will provide direct loans in amounts based on a company’s credit rating at interest rates that will be “informed by market conditions”; and
- Secondary Market Corporate Credit Facility (“SMCCF”) which will purchase corporate bonds and, under certain circumstances, US-listed exchange traded funds.
Concurrently, the Federal Reserve has announced plans for a Term Asset-Back Securities Loan Facility.
While the specific details of these programs are yet to come, the above three programs are anticipated to provide $300 billion in new funds. For additional insights see Locke Lord Article: Federal Reserve Will Become a Direct Lender to Corporations and as an Investor in Corporate Bond Market.
MIXING AND MATCHING FINANCIAL ASSISTANCE PROGRAMS:
The chart below shows the combinations of the programs highlighted above that can be accessed simultaneously by an eligible company. A green “check mark” (✔) indicates that an eligible company may access both programs in an intersecting row and column. A red “X” (X) indicates that a company cannot “double-dip” into the programs listed in that intersection row and column. Finally, “TBD” indicates that the program requirements have not yet been made available in sufficient detail to determine permitted combinations.
| PPP | ERC | EIDL | MSNLF | MSELF | PMCCF | SMCCF | |
| PPP | ✔ | X | ✔ | ✔ | ✔ | X | X |
| ERC | X | ✔ | TBD | TBD | TBD | TBD | TBD |
| EIDL | ✔ | ✔ | TBD | TBD | TBD | TBD | TBD |
| MSNLF | ✔ | TBD | ✔ | ✔ | X | X | X |
| MSELF | ✔ | TBD | ✔ | X | ✔ | X | X |
| PMCCF | TBD | TBD | ✔ | X | X | ✔ | X |
| SMCCF | TBD | TBD | ✔ | X | X | X | ✔ |
Your regular Locke Lord contact and any of the authors would be happy to assist you with these matters.
Visit our COVID-19 Resource Center often for up-to-date information to help you stay informed of the legal issues related to COVID-19.
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