Treasury Implements CARES Act $17 Billion Lending Program for Businesses Critical to Maintaining National Security | Denton

On April 23, 2020, pursuant to Section 4003(b)(3) of the Coronavirus Aid, Relief and Economic Security Act, Pub. L. 116-136 (“CARES Act”), the United States Department of the Treasury (“Treasury”) issued a loan application form for “businesses essential to the maintenance of national security”. While the application form is “for informational purposes only” to enable potential borrowers to begin preparing their respective submissions, the Treasury announced on April 25, 2020 that applications can be submitted online from April 27, 2020.

Interested companies are advised to prepare and submit their applications promptly, as applications are due to 3:00 p.m. EDT on May 1, 2020. Applications received after this date may not be considered. However, the Treasury retains its discretion to consider late applications for approval subject to the availability of funds. Prospective borrowers are reminded that unlike the Paycheck Protection Program available for small businesses, Loan Forgiveness is not available under this loan program.

Specifically, the CARES Act authorizes the Treasury to make available up to $17 billion in loans and loan guarantees for “businesses essential to maintaining national security.” Section 4003(a), (b)(3). In an interview on April 23, 2020, Treasury Secretary Steven Mnuchin, in describing the intended recipients of this loan program, said that “[t]its money pot was designed to take into account the needs of defense contractors, the main suppliers of [the Department of Defense]and other companies that hold classified information.”

The purpose of the loan program is to provide liquidity to offset covered losses, which include losses incurred directly or indirectly due to the coronavirus (COVID-19) pandemic. It is important to note that an applicant is only eligible if they have “not otherwise received adequate economic assistance in the form of loans or loan guarantees” provided by the CARES Act. Section 4002(4)(B).

The Treasury has defined a “business essential to the maintenance of national security” as a business which, at the time of loan application, is either:

  • Performance under a contract or DX Priority Order under the Defense Priority and Allocation System regulations (15 CFR Part 700); Where
  • Operate under a valid Top Secret facility security clearance under National Industrial Security Program regulations (32 CFR Part 2004).

Treasury Department, Questions and Answers: Loans to Air Carriers and Eligible Businesses and National Security Companies (updated April 10, 2020).

The application requires applicants to submit detailed information supporting any of the above. If an applicant does not meet either threshold requirement, they may still be considered for a loan if the Secretary of the Treasury, based on a recommendation and certification from the Secretary of Defense or Director of National Intelligence, determines that the candidate is essential to maintaining national security.

In addition to requiring information to support any of the above criteria, the loan application requires applicants to provide information regarding their:

  • Company structure;
  • Debt, asset and equity positions;
  • United States operations;
  • Losses covered;
  • Most recently completed IRS Form 941 (“Employers’ Quarterly Federal Tax Return”);
  • Various consolidated financial statements; and
  • Any outstanding liens with the US government.

Applicants must also submit a financial plan. Two company officials must certify that the information and certifications provided in the application are true and correct.

It is important to note that before submitting a loan application under this program, potential borrowers should be aware that these loans will be subject to certain conditions and restrictions, including:

  • If the borrower is a public company, then the borrower “must provide a mandate or participation in the [b]”orrower” to the United States government, unless the Secretary of the Treasury determines, in his or her discretion, that the issuance of such a warrant or participation would not be possible;
  • If the borrower is a private corporation, the borrower may, at the discretion of the Secretary of the Treasury, issue a senior US government debt obligation in lieu of a warrant or equity;
  • The Borrower shall maintain employment levels as of March 24, 2020 to the extent practicable and, in any event, not reduce its employment levels by more than 10% from levels on that date, at least until as of September 30, 2020;
  • Neither the Borrower nor any affiliate of the Borrower may purchase an equity security of the Borrower or any parent company listed on a national stock exchange (this restriction does not apply if the Borrower or affiliated company is obligated to purchase such security under an obligation agreement in effect as of March 27, 2020);
  • Beginning 12 months after the Borrower has repaid the Loan, the Borrower shall not pay any dividends or make any other distributions of capital with respect to the Borrower’s Common Stock;
  • Beginning 12 months after the borrower has repaid the loan, officers and employees whose total compensation (i.e. salary, bonuses, stock award and other financial benefits) has exceeded $425,000 but was less than $3 million in 2019 shall not receive: (1) total compensation in any consecutive 12-month period that exceeds total compensation received in 2019; and (2) severance pay or other benefits in the event of termination that exceeds twice the compensation received in 2019; and
  • Beginning 12 months after the borrower repays the loan, officers and employees whose total compensation exceeded $3 million in 2019 shall not receive total compensation for any period of 12 consecutive months that exceeds the sum of $3 million and 50% of the excess over $3 million. million in total compensation received in 2019.

Companies interested in applying for a loan under this program should carefully assess the applicable conditions and restrictions. Potential borrowers are also advised that recipients of treasury funds may be subject to increased government scrutiny and investigation, particularly with respect to certifications required in the application.

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