The new CARES Act provides Treasury with the authority to make loans, guarantees and other investments, and provide grants for payroll assistance to the aviation industry. On March 30, 2020, the Treasury released guidelines and procedures pursuant to these provisions.   Applications for relief for eligible passenger air carriers, cargo air carriers and certain related businesses for payroll and similar are costs are available now while applications for other relief are expected soon.  

Loan Program 

Up to $25 billion can be loaned to passenger air carriers, up to $4 billion to air cargo carriers, and up to $17 billion to businesses important to national security, which likely covers eligible businesses in the aerospace industry. These loans are intended to provide liquidity to the aviation industry related to losses incurred as a result of the coronavirus and subject to terms, conditions and covenants determined by Treasury during loan negotiations.  Treasury’s recent guidance on procedures and requirements are preliminary and subject to change, including as part of the loan application to be issued at a later date. 

Eligible Borrowers

• Passenger air carriers who derived more than 50% of their air transportation revenue from the transportation of passengers in the time period from April 1, 2019 to September 30, 2019. 
• Cargo air carriers who derived more than 50% of their air transportation revenue from the transportation of property or mail in the time period from April 1, 2019 to September 30, 2019.
• If they have not otherwise received adequate economic relief under other programs in the Act; 
  • Businesses certified by the Department of Transportation to perform inspection, repair, replacement, or overhaul services for the aviation industry
  • Ticket agents.

Required Treasury Department Determinations

• Borrower does not have other reasonable access to credit and the intended obligation will be prudently incurred. 
• Loan is sufficiently secured, or at an interest rate that adequately reflects the risk of the loan and, to the extent practicable, not less than at a market interest rate for comparable loans made prior to the coronavirus outbreak.
• Loan term is as short as practicable (but no longer than five years).
• Borrower cannot engage in stock buybacks until 12 months after the loan has been repaid (exceptions for contractual obligations entered in to prior to March 27, 2020) and that borrower cannot pay dividends until 12 months after the loan has been repaid.
• Borrower, until September 30, 2020, will not reduce its employment levels as of March 24, 2020, and after such date will not reduce its employment levels by more than 10%.
• Borrower is a U.S. entity and has significant operations and a majority of its employees in the U.S.
• Borrower has incurred or is expected to incur losses as a result of the coronavirus such that its ability to continue operations is jeopardized.

Additional Terms and Conditions

• Borrower with securities traded on a national securities exchange cannot receive a loan unless the Treasury receives a warrant or equity interest. 
• For borrowers not traded on an exchange, the Treasury has the discretion to require a senior debt instrument instead of an equity interest.
• Principal amount of the loan is not eligible for loan forgiveness. 
• For a two-year period: (1) pay above $425,000 is frozen and (2) no officer or employee whose total compensation exceeded $3 million in 2019 may receive pay in excess of the sum of (1) $3M and (2) 50% of the excess over $3M of total compensation received in 2019.
• Secretary of Transportation may require air carriers who receive assistance, to maintain services to any point that they served prior to March 1, 2020.

Prospective borrowers should begin compiling the following to prepare for submitting a loan application including (i) a description of any debt and scheduled debt service, (ii) employment levels, (iii) financial statements, (iv) detailed description of coronavirus related losses, (v) evidence credit cannot be obtained elsewhere, (vi) available seat/ton miles, (vii) revenue per seat/ton mile and cost per available seat/ton mile, (viii) assets available to be pledged as security, (ix) intended use of proceeds, (x) financial needs and how the loan will address liquidity constraints, (xi) a 2020 operating plan, and (xii) description of any cost restructuring plans. 

Payroll Support 

The CARES Act provides for financial support to be exclusively used for employee wages, salaries, and benefits in amounts up to $25 billion for passenger air carriers, up to $4 billion for cargo air carriers, and up to $3 billion for airline contractors. Applicants are eligible for an amount equal to the compensation paid to its employees for the period from April 1, 2019 through September 30, 2019 (note that 6 months compensation in 2019 is the measurement period).

The Treasury Guidelines and Application Procedures issued on March 30, 2020 indicate applications for payroll assistance should be submitted by 5:00PM EDT on April 3, 2020.  Applications submitted after that date (but no later than April 27, 2020) may be considered but approvals and applications received after April 3, 2020 may be delayed and considered subject to availability of funds. Once the application is received and Treasury has made an initial determination of eligibility based on that application, applicants must complete a Payroll Support Agreement including assurances, compensation limits, conditions and covenants, and provisions for the claw-back of payments if the applicant does not satisfy the terms of the agreement. 

Applicant Assurances

• Assistance will be used for employee wages, salaries, and benefits.
• No involuntary furloughs or layoffs will occur until September 30, 2020 nor will employee wages or benefits be reduced until such date. 
• No stock buybacks will be made nor dividends issued until September 30, 2021.

Compensation Limits

• • For a two-year period: (1) pay above $425,000 is frozen and (2) no officer or employee whose total compensation exceeded $3 million in 2019 may receive pay in excess of the sum of (1) $3M and (2) 50% of the excess over $3M of total compensation received in 2019.

Conditions and Covenants

• Treasury is authorized to receive warrants, options, preferred stock, debt securities, notes or other financial instruments for compensation for the provision of the payroll support, however, unlike the aviation industry loans for more general relief, thereare less specific requirements on the terms
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• Treasury will report to Congress on the payroll support provided.
• Treasury can refuse to provide support to entities who are or who indicated they are considering commencing a bankruptcy or insolvency filing.
• Payments can be clawed back for failure to satisfy requirements or conditions.
• Air carriers may be required by the Secretary of Transportation to maintain scheduled air transportation services that they provided to any location prior to March 1, 2020.

Application Evaluation

• Treasury will consider eligibility of applicant, the adequacy of proposed financial instruments, availability of funds, and willingness to be bound by the Payroll Support Agreement.
• Support payments may be made in multiple payments with timing determined by Treasury.  
• If there is a shortfall in available funds, Treasury may reduce the potential awards to approved applicants may be adjusted on a pro rata basis.     

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