CARES Act National Security Loans Available to Limited Number of Defense Contractors | Morgana Lewis

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The U.S. Treasury Department recently began accepting loan applications from qualified Defense Industrial Base contractors, with a short May 1, 2020 deadline to submit the application for expedited review.

Title IV of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) authorizes the Secretary of the Treasury to make loans, loan guarantees, and other investments to certain qualifying businesses that have no not otherwise received adequate economic assistance under the CARES Act. This authorization includes granting up to $17 billion in loans and loan guarantees to “businesses essential to maintaining national security.” These loans are available to offset covered losses incurred directly or indirectly due to the coronavirus pandemic.

On April 27, the Treasury began accepting national security loan applications from borrowers through a Web portal. As the application review deadline is 3:00 p.m. EDT on May 1, 2020, eligible companies should prepare and submit their applications as soon as possible to ensure their consideration.[1]

ELIGIBILITY

The CARES Act leaves most aspects of national security loans to the secretary’s discretion, including companies labeled as “critical to the maintenance of national security.” On March 30, the Treasury issued tips which generally limits such businesses to those which, at the time of loan application, are:

  • perform under a contract or priority “DX” order under the Defense Priorities and Allocations System (DPAS) regulations in 15 CFR Part 700; Where
  • · Operate under a valid Top Secret Facility Security Clearance (FCL) under the National Industrial Security Program regulations in 32 CFR part 2004.

A priced order is a prime contract, subcontract or purchase order issued under the Defense Procurement Act 1950 which by law must be executed on a priority basis notwithstanding government orders existing commercial and unrated. Listed orders are assigned one of two priority levels – DO or DX – established by regulation. As stated in the rules, DX-rated orders have the same priority as each other and take precedence over DO-rated orders and unrated orders. Most rated orders are lower-rated DO orders, and a contractor who only fulfills DO and unrated orders will not be eligible for CARES Act National Security Loan Assistance under the Scored Order of Eligibility Test.

Read our LawFlash on Defense Production Act, Noted Orders, and FCA: Long-Term Accountability Amid Current Crisis?

The other type of eligible business deemed “essential to maintaining national security” is one that holds a Top Secret installation security clearance issued by the Defense Counterintelligence and Security Agency (formerly Defense Security Service). An FCL is a determination by the federal government that a contractor is eligible for access to classified information. An FCL may be granted by the DCSA at the Confidential, Secret or Top Secret level. Only Top Secret FCLs make the contractor eligible for a national security loan under the CARES Act.

Finally, in addition to the criteria above, discretionary loans are available for entities that do not meet the rated order or Top Secret FCL requirements. Such loans may be granted if, based on a recommendation and certification by the Secretary of Defense or the Director of National Intelligence that the applicant company is essential to the maintenance of national security, the Secretary of the Treasury determines that the applicant company is essential to the maintenance of national security. Security.

TERMS

Several important requirements have been imposed on borrowers as a condition of receiving national security loans under the CARES Act. As stated in Treasury guidelines, to receive a loan, a borrower must agree to the following:

  • It will maintain employment levels on March 24, 2020, to the extent possible, and will not reduce its employment levels by more than 10% from levels on that date, until at least September 30, 2020.
  • Neither the Borrower nor any affiliate of the Borrower may purchase an equity security of the Borrower or any parent company listed on a national stock exchange, unless contractually obligated to do so. effective March 27, 2020
  • The borrower will not pay dividends or make other capital distributions in respect of its common stock until 12 months after the borrower has repaid the loan

Additionally, borrowers must agree to two separate limits on compensation paid to officers and employees receiving total compensation for calendar year 2019 exceeding $450,000 and $3 million, which remain in effect for up to 12 months after repayment. of the loan.

Finally, under the CARES Act, as a condition of receiving loans, borrowers are required to demonstrate that credit is not reasonably available at the time of the transaction.

APPLICATION

The application form requires detailed financial and organizational information and should be reviewed as soon as possible. It will probably take some time to complete. Applicants will be required to provide a description of all current debts and available collateral and lien priorities to secure the requested loan. The form also requires applicants to document expected losses from COVID-19 and their plans to adapt to the crisis, including any plans related to job changes.

Applicants should also take due note of the requirements (i) to certify that the credit is not reasonably available to the applicant elsewhere; and (ii) provide the Treasury with equity or other financial instruments considered “a reasonable interest rate premium appropriate for the benefit of the ratepayers”.

Additionally, potential borrowers should note that the certification at the end of the form appears to be made on an individual basis, under penalty of perjury.

CORONAVIRUS COVID-19 TASK FORCE

For our clients, we have formed a multidisciplinary Coronavirus COVID-19 Task Force to guide you through the wide range of legal issues posed by this public health challenge. We’ve also launched a resources page to keep you up to date with developments as they unfold.

[1] Applications received after the May 1 deadline will only be considered at the discretion of the Treasury and subject to the availability of funds.

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