On June 29th, the Federal Reserve issued a term sheet and commenced its program to support issuance of new debt by large employers. The Primary Market Corporate Credit Facility (PMCCF) will give companies access to credit by either (i) purchasing qualifying bonds as the sole investor in a bond issuance, or (ii) purchasing portions of syndicated loans or bonds at issuance. The term sheets details eligibility requirements and pricing. In addition to the PMCCF, the Federal Reserve is also operating the Secondary Market Corporate Credit Facility (SMCCF) (together, the CCFs). The combined size of the CCFs will be up to $750 billion.
In its assessment, the Board noted that “the stress brought on by the COVID event has been larger than anticipated,
affected sectors of the economy in a highly unusual way, and could result in an unusual relationship between the economic and financial factors and credit losses, in part because of extraordinary government actions.” The stress tests showed that in three downside scenarios, loan losses for the 34 banks ranged from $560 billion to $700 billion. Aggregate capital ratios declined from 12.0 percent in the fourth quarter of 2019 to between 9.5 percent and 7.7 percent in the three scenarios. Given the results, the Board took steps to “ensure large banks remain resilient despite the economic uncertainty from the coronavirus event.” For the third quarter of this year, no share repurchases will be permitted. The Board also capped dividend payments to the amount paid in the second quarter, with additional limits based on recent earnings. Banks are also required to re-evaluate their longer-term capital plans.
The CARES Act provides favorable tax treatment for coronavirus-related distributions of up to $100,000 to qualified individuals from their eligible retirement plans. Such distributions are not subject to the 10% additional tax otherwise generally applicable to distributions made before age 59 ½. The CARES Act also permits coronavirus-related distributions to be included in income in equal installments over a three-year period. Qualified individuals who take such distributions have three years to repay and undo the tax consequences of the distributions. The CARES Act also permits retirement plans to suspend certain plan loan repayments and temporarily increases the dollar limit on plan loans from $50,000 to $100,000. Notice 2020-50 expands the definition of a qualified individual to include additional factors such as reductions in pay, rescissions of job offers, delayed start dates, and being unable to work due to lack of child care due to COVID-19. The latest IRS guidance also permits factors such as adverse financial consequences to an individual arising from the impact of the COVID-19 coronavirus on the individual’s spouse or household member.
The Paycheck Protection Flexibility Act, H.R. 7010, which extends the period to use Paycheck Protection Program funds to 24 weeks, passed with unanimous consent in the Senate, and passed the House last week 471-1. The legislation also reduces the level of Paycheck Protection Program funds that must be used for payroll to 60% from 75%.
The CBO has updated its economic projections through the end of 2021 to account for the 2020 coronavirus pandemic. The CBO estimates that the real (inflation-adjusted) GDP will contract by 11 percent in the second quarter of 2020, which is equivalent to a decline of 38 percent at an annual rate. Furthermore, the number of people employed in the second quarter of 2020 will be almost 26 million lower than the number in the fourth quarter of 2019. The CBO also considers the effects of recent legislation, noting that “greater federal spending and lower revenues will cause real GDP and employment to be higher over the next few years than they would be otherwise.” However, in CBO’s assessment, “as long as some degree of social distancing remains in place, the economic boost that might be expected from recent legislation will be smaller than it would be during a period of economic weakness without social distancing.”
The report — “Questions About the CARES Act’s $500 Billion Emergency Economic Stabilization Funds” — focuses on the CARES Act’s provision of $500 billion to the Treasury Department for lending to businesses and to state and local governments. Notably, it finds that “Treasury has not disbursed any of the $46 billion it can use to provide loans and loan guarantees to the airline industry and businesses critical to maintaining national security.” Furthermore, “the Treasury has only disbursed $37.5 billion of CARES Act funds, which were invested in the Fed’s Secondary Market Corporate Credit Facility.” The report sets forth a list of “general and specific questions” for the Commission’s future work.
The new guidance clarifies the terms of the $500 billion lending program for state and local governments. The Municipal Liquidity Facility will be available to U.S. states and the District of Columbia, U.S. cities with a population exceeding 250,000 residents, U.S. counties with a population exceeding 500,000 residents, and certain multi-state entities. The new guidance sets forth revised eligibility criteria, including the requirement that eligible issuers that are not multi-state entities must have been rated at least BBB-/Baa3 as of April 8, 2020 by two or more major nationally recognized statistical rating organizations. The term sheet also sets out pricing details. Pricing will be at a fixed interest rate based on a comparable maturity overnight index swap rate plus the applicable spread (ranging from 150 to 590 basis points) based on the long-term rating of the security for the eligible notes.
The new guidance extends deadlines that affect participants’ rights to healthcare coverage, portability, and continuation of group health plan coverage under COBRA. Among other changes, the guidance extends the normal 60-day period to elect COBRA continuation coverage and the date for making COBRA premium payments by the length of the “Outbreak Period,” which is defined as the period from March 1, 2020, until 60 days after the announced end of the national emergency due to COVID-19 or such other date announced by the agency. The guidance also extends the timeframe for special enrollment in a group health plan under HIPPA, and the timeframe for participants to file benefit claims or appeals of denied claims.
Section 2102 of the CARES Act established a temporary federal program called Pandemic Unemployment Assistance (PUA) that provides up to 39 weeks of unemployment benefits, and provides funding to states for the administration of the program. An individual receiving PUA benefits who meets certain eligibility requirements may also receive the $600 weekly benefit amount under the Federal Pandemic Unemployment Compensation (FPUC) program. The April 27 guidance from the Employment and Training Administration provides states with additional instructions and FAQ guidance for implementing the emergency unemployment relief. The FAQ provides, for example, that an individual who “refuses to return to work when called back by the employer because he or she wanted to receive unemployment benefits” is not eligible for PUA. Furthermore, the FAQs provide that once the regular 2019-2020 school year is over, individuals eligible for PUA as primary caregivers for children unable to attend school should rely on “their customary summer arrangements for caring for their children.” Absent “some other qualifying circumstances,” such individuals will not be eligible for PUA once the school year has ended.
The Municipal Liquidity Facility (MLF) will provide up to $500 billion in lending to states and municipalities to help manage cash flow stresses caused by the coronavirus pandemic. The expanded scope permits purchase of short-term notes issued by U.S. states and counties with a population of at least 500,000 residents, and U.S. cities with a population of at least 250,000 residents. The reduce population thresholds permit substantially more entities to borrow directly from the MLF. The expansion also permits certain multistate entities to participate. The termination date for the facility has been extended to December 31, 2020.
The guidance seeks to address borrower and lender questions concerning the implementation of the Paycheck Protection Program (PPP), established by section 1102 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act or the Act). The additional guidance as of April 23rd seeks to clarify whether “businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan.”
The Executive Order signed by California’s governor on April 16th states that “workers who are sick are more likely to go to work if they do not have paid leave, thereby increasing health and safety risks for their fellow workers and other members of the public with whom they, or the products of their work.” Whereas the federal Families First Coronavirus Response Act (“FFCRA”) extends emergency paid sick leave requirements only to employers with fewer than 500 employees, the executive order applies to entities with 500 or more employees in the United States. The order provides two weeks of supplemental paid sick leave to certain food sector workers — including farmworkers, agricultural workers and those working in grocery stores, fast food chains and delivery drivers — if they are subject to a quarantine order, advised by a health care provider to self-quarantine, or prohibited from working by the employer due to health concerns related to the potential transmission of COVID-19.
The FAQ guidance from the Small Business Administration, in consultation with the Department of the Treasury, provides guidance to address borrower and lender questions concerning the implementation of the Paycheck Protection Program (PPP), established by section 1102 of the CARES Act.
The CFPB interpretive rule states that the stimulus payments will not be considered “government benefits,” and as such, not subject to the restrictions in the Electronic Fund Transfer Act and Regulation E.
The April 7, 2020 emergency order requires companies with either 500 or more employees within the city of Los Angeles or 2,000 or more employees nationally to provide up to 80 hours of additional paid sick time for reasons related to COVID-19. The order, which covers individuals who perform any work in Los Angeles, aims to reach workers not covered by the federal paid sick leave legislation. A number of other cities — including San Francisco and Seattle — and states — including California, Colorado, Michigan, New Jersey, and New York — have also expanded leave policies in recent weeks.