On Friday, March 27, 2020, the President signed into law a massive stimulus package - the Coronavirus Aid Relief, and Economic Security (CARES) Act - in response to the economic crisis caused by COVID-19. The CARES Act contains a number of provisions that might be of interest to electric cooperatives and their members as they try to understand the various forms of government relief available to them in light of COVID-19.

Government Lending Programs

The CARES Act creates a number of new, and modifies a number of existing, Federal government lending programs that cooperatives might utilize. An overview of the potentially relevant lending programs is provided below:

Small Business Administration's (SBA) 7(a) Loan Program

The CARES Act temporarily expands the Small Business Administration's (SBA) 7(a) Loan Program to add a "Paycheck Protection Program" (PPP) to provide new small business loans through June 30, 2020. Eligible businesses must be engaged in a "small business concern" as defined by the SBA, 501(c)(3) nonprofits, 501(c)(19) veterans’ organizations and Tribal businesses with 500 employees or fewer. The SBA defines a “business concern” as a business entity organized for profit with a place of business located in the US and which operates primarily within the US (or which makes significant contributions to the US economy). For cooperatives that are organized as 501(c)(12) entities or domestic not-for-profit entities, the eligibility requirements would not be met. However, if any such entities own a “for-profit” affiliate or subsidiary, that affiliate or subsidiary would be eligible to apply for loans under the PPP program, subject to satisfying SBA’s size standards.

In addition to having 500 or fewer employees test noted above, certain entities that meet the SBA’s industry-based size standards set out in Section 121.201 of the SBA’s regulations would also be eligible. For example, electric distribution businesses and gas distribution businesses may each have up to 1,000 employees and still be considered a “small business.” In determining the number of employees, the eligible entity would have to include employees at its affiliates. The SBA has published guidance as to what it considers affiliates which can be found here. In essence, the SBA will consider four criteria to establish affiliation: ownership of equity interests, ownership of stock options, convertible securities and agreements to merge, management control and identity of interests for close relatives. The rules are complex and require careful examination, and therefore, we encourage interested parties to consult with their attorneys.

For eligible entities, the CARES Act increases the maximum amount of the 7(a) loan program from $5 million to $10 million, with the amount to be awarded to any individual business tied to a payroll-based formula specified by the CARES Act. The SBA has set interest rates on PPP loans at one percent per annum, with a maturity of two years. Approved uses for these loans include payroll support, including salaries and paid leave, rent, utilities and health insurance premiums. The government will guarantee 100 percent of these loans through the end of the calendar year. Loan payments can be deferred for up to six months, and both borrower and lender fees are waived.

Loan recipients can receive forgiveness on the portion of these loans, which goes toward payroll costs, interest on a mortgage, or rent and utility payments made during an 8-week period beginning on the date of the origination of the loan. The amount of a loan eligible to be forgiven is reduced based on a number of factors including, the number of employees a loan recipient lays off (unless the borrower re-hires the employees) and reductions in employee compensation. Not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs.

In addition, the SBA is required to pay the principal, interest and associated fees owed on certain existing SBA loans and loans made in the next six months (excluding the expanded 7(a) loans under the CARES Act) for a six-month period.

Eligible entities considering applying for a PPP loan will need to make the following certifications:

1. that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient;
2. acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments;
3. that the eligible recipient does not have an application pending for a loan under this sub-section for the same purpose and duplicative of amounts applied for, and
4. during the period beginning on February 15, 2020 and ending on December 31, 2020, that the eligible recipient has not received amounts under this subsection for the same purpose and duplicative of amounts applied for or received under a PPP loan.

Eligible entities wishing to apply for the loan should be aware that the funds are available only on a first-come-first-serve basis. Once the full amount authorized by Congress has been fully funded, no further PPP loans will be made, unless Congress re-authorized the program.

Other SBA Programs

The CARES Act also makes changes to other existing SBA lending programs. Specifically, the maximum value of an SBA Express Loan, (lending decisions are provided within 36 hours), is increased from $350,000 to $1 million through January 1, 2021.

Also, the eligibility for an SBA Emergency Economic Injury Disaster Loan is expanded, through the end of the year, to include Tribal businesses, cooperatives and ESOPs with fewer than 500 employees.

Lending Options for Larger Businesses

In addition to the small-business targeted lending programs detailed above, the CARES Act provides two mechanisms for larger businesses to access $454 billion in Federal government supported lending.

Treasury Lending Program

The CARES Act creates a mid-size business lending facility to be administered by the Department of the Treasury. Specifically, for businesses with between 500-10,000 employees, Treasury will construct a lending facility to provide direct financing to banks and other lenders that make direct loans to such companies. These loans will have rates capped at two percent and will have at least a required six-month grace period before repayment begins. In addition to employee size, requirements to qualify for this program include certifications that:

• Uncertainty of economic conditions make the loan necessary to support operations;
• Funds will keep at least 90 percent of the borrower’s current workforce retained at full compensation;
• The borrower will restore employment levels to 90 percent of the employment and compensation as of February 1, 2020 within four months of the termination of the public health emergency.
• The borrower, with some limitations, will not engage in share buybacks, distribute dividends, offshore jobs or abrogate collective bargaining agreements.

Federal Reserve “Main Street Lending Program”

The CARES Act creates a lending program to be administered by the Federal Reserve to serve businesses of all sizes with loans, loan guarantees and other investments. Details concerning the program are not fully known at this time.

Department of Agriculture Business and Industry Loan Program

The CARES Act provides $21 million to the Rural Business-Cooperative Service (RBS) to subsidize and support an additional $1 billion in lending authority for its Business and Industry Loan Guarantee Program.

Rural Broadband Provisions

The CARES Act provides a $100 million in grants to continue the ReConnect pilot program to support the costs of construction, improvement or acquisition of facilities and equipment needed to provide broadband service in eligible rural areas.

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