Coronavirus: Economic relief measures for companies
The massive relief bill – the CARES Act – that cleared Congress on March 27 has several provisions that may help companies in the project finance market.
The bill is supposed to tide Americans over for the next four to six weeks. The $2.2 trillion in relief is about 10% of US gross domestic product.
Another bill will be needed if the economy sinks more than 10%. With the Senate in recess until April 20 and the House out for an indefinite period, another bill is unlikely before May.
The direct relief for which US renewable energy companies had hoped did not make it into the bill. That was an extension of deadlines both to start and finish construction of new projects to qualify for federal tax credits and restoration of something like the Treasury cash grant program where the government acts effectively as the tax equity investor of last resort. The renewables trade associations will make another effort in any follow-up relief bill that is enacted in May.
The relief in the CARES Act for companies is mainly modest tax deferral and loans.
Payment of the 6.2% employer share of social security taxes on employee wages for the period starting March 27, 2020 through the end of this year will be delayed and can be paid half at the end of 2021 and half at the end of 2022.
Some companies will not have to pay the employer share of social security taxes at all during some calendar quarters this year and may receive payments from the federal government instead.
Companies can fit into this category in one of two ways.
One is during quarters when their business activities are “fully or partially suspended” by a government order limiting “commerce, travel or group meetings” due to coronavirus.
The other way is if they suffer more than a 50% drop in gross receipts in a quarter this year compared to the same quarter last year. The relief in that case lasts through the first quarter when gross receipts recover to more than 80% of gross receipts during the same quarter in 2019.
Companies falling into either category will get a tax credit of up to $5,000 per employee. If the credit exceeds the employer share of social security taxes they would otherwise owe for a quarter, the government will send a check for the excess.
The credit is 50% of wages paid to employees during covered quarters. The total credit for all covered quarters is capped at $5,000 per employee. Wages include premiums paid by employers for group medical insurance.
Congress has a hard time writing simple rules.
Companies that had an average payroll during 2019 of 100 or fewer employees can claim a credit on wages paid to all employees. Larger companies can claim the credit only on wages paid to employees who are “not providing services” due to a government stay-at-home order or collapse in customer demand.
The credit can be claimed only on wages paid after March 12, 2020.
Companies that borrow new types of loans that will be available under the bill through the Small Business Administration may have to forego the payroll tax relief. This is discussed in more detail below.
The government will be offering a variety of loans to companies in an effort to tide them over. Existing loan agreements should be checked for whether they bar such borrowing. The loans work differently depending on whether the company that is borrowing has up to 500 employees or more than that number.
The Small Business Administration will guarantee up to $349 billion in loans of up to $10 million each through participating private lenders. The loans must be used to pay payroll costs, mortgage interest, rent, utilities and interest on other debt that was outstanding before January 31, 2020. They are for companies with up to 500 part-time and full-time employees (with exceptions in a few industries where companies with more employees are still considered small businesses under SBA rules).
The actual amount a company can borrow is 2.5 times average monthly payroll costs during the year leading up to when the loan is made plus refinancing for any SBA emergency economic injury disaster loan (maximum amount $2 million) borrowed between January 31, 2020 and when the new loans authorized in the CARES Act become available. The total amount a company can borrow is capped at $10 million. An employee's compensation is not taken in account when calculating average monthly payroll costs to the extent it exceeds $100,000.
The loans are nonrecourse and do not require collateral. No personal guarantees are required.
The loans will require payment of 1% annual interest. Payment of interest and principal will be deferred for the first six months.
Repayment of part of the loan will be forgiven – it will turn into a grant. The amount forgiven is the payroll costs, mortgage interest, rent and utilities the borrower has to pay during the first eight weeks after the loan is made. However, the amount forgiven for spending on things other than payroll costs will be capped at 25%.
Normally when repayment of a loan is forgiven, the borrower must report the amount as taxable income. No income will have to be reported in this case.
The amount forgiven will be subject to a haircut if employee wages are cut by more than 25% and by the percentage reduction in the average monthly “full-time equivalent” employee headcount during the eight-week period. Companies can choose as a baseline for calculating the reduction in employee headcount either the average monthly headcount during January and February 2020 or during the period February 15 through June 30, 2019. The haircut for a cut in employee wages is dollar for dollar for the excess cut above 25% for any employee.
Any remaining loan balance must be repaid within two years after the loan was made.
The US government will repay lenders the part of the loan that is forgiven.
Companies interested in these loans should approach a bank or other lender that makes loans through SBA programs. The bill requires applications to be processed within 60 days. The US government hopes that the process can be more streamlined. The SBA has a current network of about 1,800 participating lenders. This network is expected to expand. The US Treasury plans to issue regulations promptly allowing all FDIC-insured banks to participate.
Loans made under the program will be assigned a zero risk weighting for purposes of bank capital adequacy requirements.
Borrowers must certify that “uncertainty of current economic conditions make necessary the loan request to support ongoing operations” and that the money will be used to “retain workers” and to pay payroll costs, mortgage payments, rent and utilities. The list of uses to which a borrower must certify does not mention use of loan proceeds to pay interest on other already outstanding debt beyond mortgage interest.
There is a tradeoff to borrow under this program. Companies doing so will not be able to claim a credit against the employer share of social security taxes for wages paid to employees, and they will not be able to push payment of the employer share of social security taxes for the remainder of this year into 2021 and 2022 if any part of the SBA loan is forgiven.
Congress set aside $454 billion to support Federal Reserve Board efforts to shore up liquidity in the corporate and state and local government debt markets.
US Treasury Secretary Steven Mnuchin said the $454 billion could lead to up to $4 trillion in additional lending capacity.
The $454 billion is a form of Congressional buy-in to cover losses on loans to any businesses that fail.
The US Treasury is supposed to work with the Federal Reserve Board to set up a new facility to provide financing for banks to lend to businesses at interest rates no higher than 2% with no interest or principal due on the loans for the first six months.
The loans are for “mid-size” businesses with between 500 and 10,000 employees.
Borrowers must promise to get to at least 90% of their February 1 employee headcounts at full compensation and benefits within four months after the current federal public health emergency declaration ends. The US has been in a state of public health emergency for coronavirus since January 27, 2020.
Borrowers cannot “outsource or offshore” any jobs during the loan term plus two years and must remain neutral to any union organizing effort. They must be US companies with a majority of their employees based in the United States.
They cannot pay dividends on common stock or buy back any equity security listed on a national exchange while the loan is outstanding.
The bill authorizes another $46 billion in targeted direct lending and loan guarantees by the US Treasury to airlines, cargo air carriers, travel agents and “businesses that are critical for maintaining national security.” The amount earmarked for critical businesses is $17 billion. It is unclear what businesses will be considered critical for national security, but presumably utilities, pipelines and transmission companies fall into this category.
Loans out of the $46 billion will be as short term as possible, but not longer than five years. The interest rate cannot be less than the market rate for comparable obligations before the COVID-19 outbreak.
Before the Treasury can make a loan or loan guarantee from the $46 billion, it must determine that credit is not reasonably available to the company and the loan or loan guarantee is “prudently incurred” and is “sufficiently secured.” At the same time, the borrower must be expecting losses “such that continued operations of the business are jeopardized.”
Companies borrowing part of the $46 billion cannot reduce employee headcount through next September 30 by more than 10% from the headcount on March 24, 2020. They cannot pay dividends or make other capital distributions on common stock or buy back any equity security listed on a national exchange while the loan is outstanding plus one year.
The government will insist on a warrant or other equity interest in companies tapping into the $46 billion so that US taxpayers benefit from any appreciation in share value. The Treasury has discretion to agree instead to a senior debt instrument with an interest-rate premium from companies that are not publicly-traded.
An additional drawback of tapping into the $46 billion is companies will have to agree to limits on executive compensation.
Officers and other employees whose total compensation was more than $425,000 in 2019 cannot be paid more than that amount in any 12-month period, while the loan or loan guarantee is outstanding plus one year. They cannot be paid severance during that period of more than two times 2019 total compensation,
Anyone whose 2019 total compensation was more than $3 million will have to take a pay cut. Total compensation during any 12-month period, while the loan is outstanding plus one year, cannot exceed $3 million plus half the amount of 2019 compensation above $3 million.
Total compensation for these purposes includes not only salary and bonuses, but also stock awards and other financial benefits.
No assistance will be available under the $494 billion or the $46 billion to any company in which a member of Congress, agency head, Trump, Pence or their spouses, children, sons-in-law or daughters-in-law own at least a 20% interest by vote or value.
Details about assistance provided will be published on the Treasury website or in a report by the Federal Reserve Board to the banking committees in Congress. Disclosure of direct Treasury loans and loan guarantees will include copies of the final term sheet and other transaction documents.
The authority to make new loans, loan guarantees or other investments under these facilities ends on December 31, 2020. Existing loans and loan guarantees on that date can be restructured or amended, but cannot be forgiven or extended to run longer than five years from when the loan was originally made.
And more loans
Separately, the Federal Reserve Board said on March 23 that it will make direct loans to companies that are rated at least BBB-/Baa3 as of March 22 through a special-purpose vehicle funded by the New York Federal Reserve Bank. A company's rating can have deteriorated since March 22, but must not have fallen below BB-/Ba3.
Borrowers will be limited to borrowing a percentage of the highest amount of outstanding debt they had on any day in the last year running up to March 22, 2020.
This Fed window will remain open through September 30, 2020. It is called the primary market corporate credit facility.
The interest rate and other terms will be “informed by market conditions.” The loans cannot run longer than four years. A commitment fee of 100 basis points must be paid. Loans can be used to refinance existing debt, but only after the existing debt is in the last three months before maturity.
Borrowers must be US entities with significant operations and a majority of their employees in the United States. Any company receiving "specific support" under the CARES Act and companies owned at least 20% by a member of Congress, agency head, Trump, Pence or their spouses, children, sons-in-law or daughters-in-law cannot borrow through the facility.
Other tax relief
Two other provisions in the CARES Act are worth mentioning, but are unlikely to be of much help to project developers.
The 2017 US tax reforms made it more difficult for the country to pull out of a recession. One change stopped companies from carrying back net operating losses or NOLs to get refunds of past taxes and limited losses carried forward to future years from offsetting more than 80% of future income.
The CARES Act allows losses in 2018, 2019 and 2020 to be carried back five years – so as far back as 2013 – to get refunds of any taxes paid. Losses carried back to 2017 or an earlier year will offset corporate taxes at a 35% rate (as opposed to the 21% rate that took effect in 2018).
As for carryforwards, the 80% limit will not apply to 2018 or 2019 losses carried to 2019 or 2020.
The 2017 tax reforms also made it more expensive to borrow money. Interest can only be deducted up to 30% of “adjusted” taxable income for the year.
The CARES Act increases the amount to 50% for 2019 and 2020 and lets companies use 2019 adjusted taxable income for the 2020 calculations. However, if a company has no income in either year, then 50% of $0 is $0.
Regulated utilities are not subject to the cap on interest deductions. Most independent power companies, which are subject to it, are in a net tax loss position. The cap is applied at the partnership level for projects that are owned by partnerships. (For more detail, see “Cap on Interest Deductions Explained” in the December 2018 Project Finance NewsWire.)
Most companies can add back depreciation to taxable income through 2021 when arriving at “adjusted” taxable income. This makes the cap less likely to come into play because 30% –- or now 50% –- will be that percentage of a higher number.
However, the IRS took the position in proposed regulations in late 2018 that manufacturers cannot add back depreciation. Companies that generate electricity are considered manufacturers for this purpose. The Trump administration has been lobbied heavily to back off the position. Final regulations are expected imminently. The White House office –- OIRA –- that reviews tax regulations before they can be released finished its review on March 20.
Section 139 of the US tax code –- enacted after the terrorist attacks on the World Trade Center and the Pentagon on September 11, 2001 –- may also provide some relief. It spares individuals from having to pay taxes on payments to cover “personal, family, living [and] funeral expenses” connected to a federally-declared disaster. This should shield not only government payments, but also payments from employers from income taxes. Any employer making such a payment would still be able to deduct it, and the payment would not count as wages for purposes of social security and other employment taxes.
A challenge after the US moves into economic recovery will be how companies are supposed to climb out from under all the debt and deferred taxes that the relief measures will pile on. The hope must be that revenue lost during the coronavirus downturn is merely deferred revenue that pent-up consumer demand will help to restore later.