The Airline Industry and the CARES Act: What Secured Lenders Need to Know | King and Spalding
Since its enactment, aviation-related companies have received more than $ 50 billion in grants and loans under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) which was passed in March 2020. But how do these grants and loans impact secured lenders to these businesses? This Customer Alert briefly highlights the types of funds made available to the airline industry under the CARES Act and the issues secured lenders should consider.
TYPES OF FUNDS MADE AVAILABLE TO THE AIRLINE INDUSTRY
There are three pools of segregated funds that have been made available to the airline industry under the CARES Act. First, the Air Carrier Worker Support Program (“ACWSP”), available under Section 4112 of the CARES Act, which provides total payroll support of $ 25 billion to passenger airlines and airlines. some airline contractors to maintain employment and avoid job cuts. Second, the business loan program authorized by section 4003 of the CARES Act (the “business loan program”), which provides loans to eligible businesses, including up to $ 25 billion for air carriers. passengers and some maintenance facilities. Third, the Paycheck Protection Program (“PPP”), which was implemented by the Small Business Administration with support from the Department of the Treasury (the “Treasury”), which provides small businesses with funds to pay. salary costs, including fringe benefits, and certain other professional expenses.
Since each of these sources of funding has its own requirements and restrictions, it is essential that secured lenders understand the specific source of any funds received and the various restrictions attached to it.
SECURE LENDERS MUST DUE DILIGENCE
To this end, secured lenders must exercise due diligence with respect to any loans or grants that may have been received by their borrowers. Copies of all application documents, including amendments and modifications, should be requested, as well as all correspondence with the relevant government body. Secured lenders may also wish to modify their underlying credit documents to require the borrower to share those documents. This will help keep lenders informed and will be essential in understanding what funds the borrower has received and what restrictions apply, if any.
KNOW THE AUTHORIZED USES AND ACCESS OF A LENDER TO THESE FUNDS
While the CARES Act funds have provided a tremendous lifeline to the airline industry, these loans and grants can only be used for prescribed purposes. For example, loans made under the PPP program will be canceled, but only when used for staff costs and certain other authorized expenses. Lenders therefore have an interest in ensuring that borrowers use the funds in a way that allows for remission. On the other hand, loans granted under the business loan program cannot be canceled, regardless of their use. The funds under the business loan program are guaranteed and come with many restrictions. For example, the $ 7.5 billion loan and loan commitment issued to American Airlines typically prevents, among other things, the repurchase of equity securities and the payment of dividends and other distributions of capital.
Funds received under the ACWSP can only be used for salaries, wages and benefits of certain employees and beneficiaries cannot involuntarily dismiss employees and cannot reduce the salary or benefits owed to employees until ‘as of September 30, 2020. These restrictions (which again, only applied until September 30) resulted in a number of mass layoffs on October 1. The Special House Subcommittee on the Coronavirus Crisis (the “Subcommittee”) has since contacted a number of entrepreneurs who have received funding under the ACWSP to ask them to continue to volunteer. comply with restrictions (beyond the September 30 deadline) until all of the Contractor’s PESA products have been fully used. Although not mandated by the CARES Act, the subcommittee received such a commitment from some entrepreneurs who were contacted and should use these concessions to pressure other entrepreneurs to make the same commitment.
In addition to knowing the permitted uses of these funds, it is also important to know how the funds were issued and how they are to be held. For example, while PPP loans were distributed all at once with no restrictions on how those funds were to be held, funds distributed under the ACWSP have certain holding requirements depending on whether they were received in. a single payment or in multiple distributions. Recipients who chose to receive funds in a single installment were required to keep those funds in a separate account subject to an audit agreement in favor of the Treasury. However, beneficiaries who elected to receive the proceeds as multiple distributions were not required to segregate the funds.
Similarly, a secured lender should be aware of their ability to coerce the borrower into using the proceeds (rather than accumulating the funds). If the borrower has free cash flow to meet payroll and other obligations, the borrower may choose to keep the proceeds of the CARES Act in reserve. Given the Treasury’s ability to cancel these loans in certain circumstances or penalize the borrower for violations of the CARES Act or the Payroll Support Program Agreement, some borrowers may be concerned about liability if an error occurs. or some other problem is discovered in the underlying loan application or in the use of the proceeds. If the borrower holds the proceeds in reserve, the funds could potentially be used as “war chest” to fund future bankruptcy proceedings.
Given the current distress in the market, secured lenders should also have an eye on what happens if the borrower files for bankruptcy. The Payroll Support Agreement, which governs funds received under the ACWSP, states that in the event the borrower declares bankruptcy, the funds advanced under the program will be segregated and will not constitute or become the property of the borrower’s estate under section 541 of the Bankruptcy Code (that is to say, the provision of the Bankruptcy Code which provides that when filing a bankruptcy case, a “mass” is created which includes all the assets of the debtor). If this provision is enforced by the bankruptcy court, the borrower will no longer have access to the payroll assistance provided under the program. However, bankruptcy courts may find that the provision is unenforceable because the parties are generally not allowed to change the scope of a debtor’s bankruptcy or bankruptcy protections by a private contract. See In re Huang, 275 F.3d 1173, 1177 (9th Cir. 2002) (ruling that it is contrary to public order for a debtor to waive pre-establishment, protection provided for by the Bankruptcy Code).
Unlike the ACWSP, borrowers who received funds under the business loan program were generally required to provide collateral for these loans, meaning that the Treasury would be a secured creditor in the event of bankruptcy. A potential bankruptcy in this scenario raises several important questions. Will the Treasury act as a rational and economically motivated secured lender or will politics and politics guide its decisions? How well will the Treasury support the borrower’s bankruptcy process? And what (if any) will they need in return for this support? The answers to these questions remain to be seen and may vary depending on the circumstances.
Ultimately, the influx of cash to the airline industry under the CARES Act gave struggling beneficiaries a lifeline to continue their operations despite deteriorating revenues and profitability. These loans and grants raise concerns and questions for secured lenders, especially with regard to their interest in the proceeds received by the borrower. Accordingly, secured lenders should remain vigilant with respect to their respective borrower’s receipt of the CARES Act proceeds, must be aware of the permitted use and access to such product, and must consider potential issues. that can arise in what, in this climate. , may be inevitable bankruptcy.