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 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 Equal Employment Opportunity Commission pulled its Technical Assistance Q&A regarding “return to work” for employees whom the employer believes are at a higher risk for severe illness if they were to contract COVID-19. The original guidance posted on Tuesday May 5, 2020 indicated that an employer could exclude an employee from returning to work solely because the employee has an underlying condition placing that worker at higher risk for serious COVID-19 illness.
The revised guidance released on Thursday May 7, 2020, now provides that: “If the employer is concerned about the employee’s health being jeopardized upon returning to the workplace, the ADA does not allow the employer to exclude the employee – or take any other adverse action – solely because the employee has a disability that the CDC identifies as potentially placing him at “higher risk for severe illness” if he gets COVID-19.” (Response to Question G4) (emphasis added).
An employer can only bar such an employee from returning to work if “the employee’s disability poses a ‘direct threat’ to his health that cannot be eliminated or reduced by reasonable accommodation.” (Response to Question G4)
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.
The Small Business Administration released a statement Sunday providing details on Round 2 of the Paycheck Protection Program (the loan/grant program for small businesses initially enacted in the CARES Act and then refunded through supplemental legislation, H.R. 266, a few weeks later). The joint statement from the SBA and Secretary of the Treasury Steven Mnuchin noted that in this second round of loans which began on April 27, 2020, over $175 billion has been disbursed through 2.2 million loans. The average loan size is now $79,000.
Responding to concerns that smaller lending institutions were closed out of the loan process in Round 1, the statement offers data on the lenders in this Round: “Nearly 500,000 of the loans were made by lenders with less than $1 billion in assets and non-banks. These lenders include Community Development Financial Institutions, Certified Development Companies, Microlenders, Farm Credit lending institutions, and FinTechs. Over 850,000 loans—about one third of the 2.2 million loans—were made by lenders with $10 billion of assets or less.”
Important questions remains, however, about exactly how these small businesses can ensure that the loans they are receiving through the Paycheck Protection Program qualify for loan forgiveness. These businesses and their advisors continue to await further guidance from the goverment. On Friday, the AICPA issued a statement urging immediate guidance on these time sensitive questions for businesseses.
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 OECD has released a report tracking and reviewing countries’ tax and fiscal responses to the COVID-19 crisis. In this April 15, 2020 report, the OECD makes a series of observations and recommendations for the future, noting that “some are already suggesting the need for a new kind of ‘Marshal Plan’ to support the poorest countries.”
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.
An updated version of the Working Paper, Regulating in Pandemic: Evaluating Economic and Financial Policy Responses to the Coronavirus Crisis by Hiba Hafiz, Shu-Yi Oei, Diane M. Ring, and Natalya Shnitser has been posted. The Working Paper is revised and updated to incorporate the CARES Act (H.R. 748) as well as recent action by the Federal Reserve, the Department of Labor, and other agencies.