As COVID-19 creates a complex reality, PESA remains steadfast in assisting companies throughout the energy industry in understanding what recourses are available. PESA Member Company AlixPartners and its industry team hosted a webinar to specifically dissect the CARES Act and other federal programs available to PESA’s membership. Michael Chiock, Managing Director, Atlanta; Regina Lee, Managing Director, Houston; Kevin Montague, Managing Director, Chicago and Isabel Kunsman, Managing Director, Washington D.C., offered attendees insights as they face uncertain times and complex federal responses.
SIZE MATTERS – CARES ACT FUNDING
Prefacing the process for successfully attaining aid, Lee reminded attendees that each situation and company requires a unique and in-depth analysis of government guidance issued. To understand what is available in form of government aid during the COVID-19 crisis, Lee began by discussing the CARES Act and the basic loan provisions for each company size.
For mid-sized companies (generally 500-10,000 employees), there are low interest loans which require companies to retain 90% of the workforce at full compensation through September 30. There are additional restrictions regarding equity transitions, job outsourcing and executive compensation. If compliance is not possible, Lee pointed to the new Main Street lending program as an option.
Large companies with more than 10,000 employees are also eligible for loans, but the interest rate is meant to be a market rate. Like midsize companies, there are restrictions on equity transactions limits on executive compensation. However, these loans cannot be forgiven and must be secured with equity or other collateral.
PESA has compiled various resources including a webinar with the SBA on how small businesses can access CARES Act loans.
WHAT TO EXPECT: APPLICATION
Currently applications are not yet available for the midsize or large company loans. However, Lee pointed to the airline industry guidance as “roadmap” that members could use to support an application which include:
- Debt listings and debt service schedules for existing debt
- Prior, current and future employment and compensation levels
- Audited financial statements for the past three years
- Schedule of losses incurred and expected due to the COVID-19 crisis
- Operating plan for 2020 if loan is approved
- Plans to restructure costs or improve the business generally and how headcount fits into those plans
MAIN STREET LOAN FACILITIES
The new Main Street program is a $600 billion facility managed by the Federal Reserve, which provides companies with up to 10,000 employees or $2.5 billion in earnings before interests, taxes, depreciations and amortization (EBITDA). Although it had the same restrictions on equity transaction and executive compensation, maintaining a level of employment is not defined rather simply encouraged. So far, the guidance indicates that the loans will have a four-year maturity with a variable interest rate and caps depending if the loan is new or being restructured.
PROGRAM PARTICIPATION CONSIDERATIONS
Montague’s takeaway for the audience is that while evaluating government air programs, focus on cash and adjusting the business to reflect the current reality. Companies need to understand their liquidity needs and the top-line revenue impact of COVID-19, and create a series of scenarios to evaluate the outcomes and different lengths of time for recovery. Following this, he suggested looking critically to identify the appropriate cost structure for the reduced top-line revenue. Having enough cash flow is paramount. The highest priority is translating the top-line revenue reduction into cash and evaluating the COVID-19 impact on working capital.
PRIMARY AND SECONDARY MARKET CORPORATE CREDIT FACILITY (CCF)
Both of these programs recently released by the Federal Reserve provide liquidity to the investment grade corporate debt markets through the purchase of corporate bonds issues by eligible companies. Additional guidance on these programs is expected to be released soon by the Federal Reserve Bank of New York, who will be operating these programs with funding of up to $750 billion.
Each of the facilities includes various criteria for participation including disclosures on participant’s revenue, transaction amounts and costs.
RECESSION PROGRAMS REVIVED
To conclude the overview of available government aid programs, Kunsman shared how two programs from the 2008 financial crisis have been reinstated: Commercial Paper Funding Facility (CPFF) and Term Asset-Backed Securities Loan Facility (TALF).
TALF will make up to $100 billion of non-recourse loans available with three-year terms and fully secured by eligible asset backed securities (ABS). Kunsman pointed that the most relevant ABS eligible to OFS companies are “newly issued U.S. dollar denominated cash ABS backed by equipment loans and leases and certain small business loans that are guaranteed by the Small Business Administration.”
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