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The aviation industry has been on the front line of the COVID-19 crisis since it started in Asia-Pacific earlier this year. The development of the crisis into a full-blown pandemic has caused the economic impact to escalate dramatically. While national stimulus plans offer potential relief to an industry in distress, lessors and lenders should carefully consider the implications that stimulus plans may have on the financial stability of the airlines whom they are dealing with in leasing or financing transactions.
On 27 March 2020, the US passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law as a response to the economic impact of the COVID-19 pandemic. This legislation is particularly important to the US-based airlines in that it includes, among other things, provisions for US$25 billion in loans and loan guarantees to passenger airlines and US$4 billion in loans and loan guarantees to cargo airlines. The legislation also offers airlines significant grants for payroll financial assistance and other stimulus for the US aviation industry and financial sector.
The CARES Act is available to US businesses, which means that a qualifying airline must (1) be created/organized in the US, (2) have significant operations in the US, and (3) have a majority of its employees located in the US. In considering whether an aviation lessee or borrower is an eligible US business under the CARES Act, here are other requirements that must be met in order for them to receive benefits of the loans and loan guarantees:
- Eligible. The applicant is an eligible business satisfying the above-mentioned requirements.
- No alternative available. No alternative financing is reasonably available to the business.
- Prudent. The intended obligation is prudently incurred.
- COVID-19. The borrower’s operations are jeopardized by losses related to the coronavirus pandemic.
A loan or guarantee made under the CARES Act is required to be short term and sufficiently secured or made at an interest rate that reflects the risk of the loan and not less than an interest rate based on market conditions for comparable obligations before the COVID-19 outbreak.
If you are dealing with airlines in the US as a counterparty to your lease agreement, loan agreement or the like, it is prudent for you to consider the implications that the CARES Act may have on your counterparties. In particular, in exchange for loan and/or loan guarantees, eligible US aviation businesses will be required to grant the US Government warrants or other equity interests to compensate the US Government for the economic relief. Eligible US aviation businesses that receive payroll support grants may also be required to grant the US Government warrants or other equity interests. In addition, recipients of loan and loan guarantees, as well as grants, will have to comply with various restrictions, including limitations on furloughing, laying-off or reducing pay for employees, limitations on buying back shares and paying dividends, and strict limits on executive compensation.
Please see our other articles on the CARES Act for more details:
- Help on the horizon: Aviation and the new CARES Act
- Questions of interest to non-US companies under the CARES Act
- Section-by-section summary of CARES Act
- Congress Passes $2.2 Trillion COVID-19 Stimulus Bill
- CARES Act funding for specific categories of businesses
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