On March 27 Congress passed, and President Trump signed, legislation known as the Coronavirus Aid, Relief and Economic Security (CARES) Act. The cruise lines themselves may not benefit from this legislation and have accessed capital through other means. However, the many organizations that form the distribution network for cruises, service the ships; provide fuel, maintenance, food and other supplies to these floating cities; concessionaires, port agents, tour operators and numerous others may be provided a lifeline by CARES.
Small business assistance
Paycheck protection. The CARES Act establishes the Paycheck Protection Program, an expansion of the Small Business Administration (SBA) 7(a) loan program and appropriates $349 billion for the program.
The Act establishes the program’s eligibility to include companies with no more than 500 employees. Both full- and part-time employees are counted. For companies that fall into the North American Industry Classification System for accommodations and food service (e.g., hotels, restaurants), the 500-employee maximum helpfully applies to each location.
Since many of the businesses that service the cruise industry are international organizations, it is important to point out that in some cases, a business owned/managed by a non-U.S. citizen, foreign business entities or non-immigrant aliens can be eligible for SBA financing. Eligibility for these entities will be determined on a case-by-case basis.
The maximum loan amount is the lesser of (i) $10,000,000 or (ii) the average monthly payroll amount for the trailing 12 months times 2.5, plus the amount of any pre-existing SBA loan to be refinanced. The loan proceeds may only be used for payroll, employer group health, interest on mortgage obligations, rent, utilities and interest on other debt incurred before Feb. 15, 2020.
The interest rate for the loans is set at four percent. Collateral and personal guarantee requirements are waived. Repayment is deferred for at least six months, and up to one year, based on guidance to be issued by the SBA within 30 days after the date of enactment of the CARES Act. Loans made are nonrecourse. The loans are actually provided by SBA participating banks and financial institutions on an expedited basis. Most banks currently provide SBA loans.
Borrowers are eligible to have loan amounts forgiven to the extent the proceeds are used to pay for payroll expenses, interest on covered mortgage obligations, covered rent obligations, and utilities, during the period ending June 30, 2020. The loan forgiveness, which would typically be included as income for tax purposes, is exempt from income taxes. Based on the forgiveness provision of this program, there is little reason for an eligible business not to take advantage of this benefit for itself and its employees.
Emergency economic injury disaster loans and grants. The Act provides for Emergency Economic Injury Disaster Loans (EIDL) and grants for eligible entities for a covered period from January 31, 2020, to December 31, 2020. Eligible entities are similar to those under the Paycheck Protection Program. The applicants do not have to show that they cannot obtain credit elsewhere. The loan may be approved based solely on the credit score of the applicant (no tax returns required), or SBA may use alternative methods.
Emergency grants. Any eligible entity that applies for an EIDL can apply for a grant in an amount as requested by the applicant, but not to exceed $10,000. Grants are to be paid within three days after the SBA receives the EIDL application. These grants can be used for any allowable purpose, including payroll, paid sick leaves, cost of materials, rent or mortgage, or other obligations that cannot be met. The grant does not have to be repaid even if the EIDL is denied.
Subsidies for certain loan payments. The SBA will pay the principal, interest and any associated fees that are owed on certain existing loans (SBA loans, loans from state and local development companies, and microloans) for a six-month period starting on the next payment due (taking into account any deferment).
Large businesses
Title IV of the CARES Act provides $500 billion in emergency funding to the U.S. Department of Treasury’s Exchange Stabilization Fund to provide economic relief in the form of loans, loan guarantees, and other investments in businesses, states and municipalities impacted by coronavirus.
Airlines and national security. The government has committed $29 billion for direct loans or loan guarantees to the airline industry and $17 billion for businesses deemed critical to national security. We will briefly summarize these provisions since they do not relate to most businesses in the cruise industry.
Businesses eligible for this relief must have continued operations jeopardized by losses from the coronavirus crisis. To be eligible for the funding, other forms of alternate financing must not be reasonably available to the business. The Federal Reserve Bank will price assistance on a risk-adjusted basis and, if possible, at interest rates and terms based on market conditions for comparable obligations before the coronavirus outbreak. Borrowers and their affiliates cannot engage in stock buybacks, unless required under pre-existing contracts, or pay dividends, until one year after the date the loan or loan guarantee is no longer outstanding.
The Treasury Department will publish procedures for submitting applications and minimum requirements within 10 days of the date of the enactment of the CARES Act.
Other business and local government support. The remaining $454 billion is available to support relief to all other eligible businesses, states and municipalities in the form of interest-bearing loans, loan guarantees and other investments, including equity investments in programs and facilities established by the Federal Reserve Bank. Borrowers with direct loans under these facilities cannot, absent a waiver, engage in stock buybacks, unless required under pre-existing contracts, or pay dividends, until one year after the date the loan is no longer outstanding. The restrictions on compensation outlined above applicable to airline carriers and national security businesses likewise apply.
All applicable requirements under Section 13(3) of the Federal Reserve Act apply to these programs and facilities. This includes a requirement that any borrower be solvent (i.e., not in bankruptcy, resolution under title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act, or any other federal or state insolvency proceeding).
Medium-sized businesses
The CARES Act also provides for the Treasury Department and the Federal Reserve to work together to implement a special Section 13(3) Federal Reserve facility that provides financing to banks and other lenders that make direct loans to nonprofits and mid-sized businesses (500 to 10,000 employees).
Eligible borrowers applying for direct loans under this program will be required to certify, among other things, that the uncertainty of economic conditions makes the loan request necessary to support ongoing operations and the funds received will be used to retain at least 90 percent of the recipient’s workforce, with full compensation and benefits, through September 30, 2020, and the recipient intends to restore not less than 90 percent of its February 1, 2020 workforce with full compensation and benefits no later than four months after the end of the coronavirus public health emergency.
The recipient must also agree it will not pay dividends or conduct stock buybacks while the loan is outstanding, except for pre-existing obligations, and the recipient will not outsource or offshore jobs for the term of the loan plus an additional two years. To be eligible the recipient must be created/organized and domiciled in the U.S. with significant operations and a majority of employees located/based in the U.S.
The recipient must not be a debtor in a bankruptcy proceeding and must agree it will not abrogate existing collective bargaining agreements for the term of the loan plus an additional two years; and the recipient will remain neutral in any union organizing effort for the term of the loan. Businesses will need to evaluate the relative costs and benefits of receiving assistance given the foregoing requirements.
Congress left a tremendous portion of the terms of these large company programs for the Department of Treasury to determine in regulations. Those regulations are required to be issued within 10 days and will provide greater insight into the implementation and terms of these loans.
Conclusion
The CARES Act also includes various tax benefits for individuals and businesses that are not addressed in this article. The small business program in the CARES Act is much more favorable than those for larger businesses, an established system of banks that make SBA loans already exists and far fewer conditions/strings are attached to those benefits. We will not understand the program for larger businesses well until the Treasury Department issues the implementing regulations.
In addition to these government programs, businesses should be speaking to their creditors to defer principal payments on loans, drawing down on or obtaining additional credit facilities, if possible, and otherwise conserving cash. Many companies are dealing with and considering the implications of force majeure provisions in their various contracts. Now that many have moved to remote workforces, businesses will need to consider the cybersecurity implications. Additionally, the wage and hour laws and other employment laws will impact remote workforces.
We all know that before long we will be addressing how to safely begin bringing employees back to work. The industry bounced back from 9/11 and the great recession and will bounce back from this crisis, though it may take longer than some industries due to negative perceptions created early in this crisis. In the meantime, the U.S. government has provided some valuable assistance to certain companies and those who are adaptable and prepared will be better positioned when that recovery comes.
Robert Kritzman can be reached at [email protected].
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