CARES Act Relief Forcing Companies to Evaluate Loan Agreements

If there’s one thing the federal government loves, it’s acronyms. Capitol Hill has a special talent for shoehorning complicated legislation into pithy monikers to market to voters. Hence the last economic rescue bill became the Coronavirus Aid Relief, and Economic Security Act as a reminder that Congress CARES.

With a global shutdown roiling markets, companies are discovering how much another group cares about them: creditors. More specifically, lenders care about the looming fears of borrowers closing up shop and defaulting on their loans. That’s leading to some tricky conversations about revising existing debt agreements.

The CARES Act has introduced new variables into these conversations. For starters, it created the Paycheck Protection Program. The PPP – another abbreviation – authorizes up to $349 billion in forgivable loans for small businesses. The program calls for loans to be forgiven provided that recipients use the funds for payroll costs and most mortgage interest, rent and utility costs for eight weeks after the loan is distributed.

Then there’s the pool of about $500 billion set aside by the legislation for loans to major corporations. These loans come with strings attached such as bans on stock buybacks and requirements for public disclosures. (We previously covered how MGM Resorts is structuring employment agreements to retain flexibility to stay eligible for CARES Act relief.)

In an article on borrowers’ considerations in the time of COVID-19, lawyers with Nelson Mullins pointed out that lenders appear willing to waive some principal amortization payments and mandatory prepayments that are supposed to be triggered when additional debt is incurred. That would include government relief. Similarly, government loans may violate indebtedness covenants in some loan agreements, meaning companies would need waivers from their lenders.

In fact, disclosures from public companies are already beginning to reflect such revisions to existing loan agreements. For example, according to Xcel Brands Inc.’s 10-K filing from April 14, the apparel company and its lender created a carve out for PPP loans to prevent Xcel from exceeding its covenant ratios. Blonder Tongues Laboratories said it reached an agreement that restricted the ability of its lender to access funds it received via the PPP.

Meanwhile, Hersha Hospitality Trust disclosed a credit-agreement amendment that enabled the hotel REIT to acquire CARES Act debt without the consent of its existing lenders. Conversely, AgeX Therapeutics Inc. revealed that it needs its lenders to sign off on any government loans.

The bottom line: Companies have to review their existing debt agreements before charging ahead with government relief programs. If not, they may find some nasty surprises in store when the loan checks hit their bank accounts.

For more of our coronavirus coverage, see our previous blog posts on the subject.