U.S. Treasury, Q&A: Loans to Air Carriers and Eligible Businesses (July 15, 2020)

Summary

A U.S. Treasury Q&A on loans to air carriers and eligible businesses, dated July 15, 2020. It is organized under the headings Eligibility and Terms and Conditions, following an opening section on credit standards. Treasury states that the minimum size of a loan from Treasury is $250,000, and lists loan-to-value standards on collateral, including 50% at closing for aircraft and 85% at closing for accounts receivable. It states that Treasury encourages applicants that appear to be eligible for a loan from a bank participating in the Federal Reserve's Main Street Lending Program (MSLP) to apply for such a loan first. It states that loan proceeds must be used for general corporate purposes and operating expenses, including scheduled interest payments on debt incurred before February 15, 2020.

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                   Q&A: Loans to Air Carriers and Eligible Businesses
                                    July 15, 2020


CREDIT EVALUTION

1. Will Treasury apply credit standards in determining whether applicants are eligible
   to receive loans and the amount of such loans?

   Yes. Treasury will determine loan eligibility and maximum loan sizes based on uniform
   credit standards.

   For applicants that are able to provide unencumbered collateral to secure the loans from
   Treasury, maximum loan amounts will be based on the following loan-to-value standards
   on specific types of collateral:
    Real estate: 50% at closing
    Aircraft: 50% at closing
    Engines and spare parts: 50% at closing
    Slots, gates and routes: 50% at closing
    Flight simulators: 50% at closing
    Ground support equipment: 25% at closing
    Accounts receivable: 85% at closing
    Loyalty programs: 50% at closing

   Applicants that do not have available unencumbered collateral to secure the loans from
   Treasury will be eligible for unsecured loans only if they pass the following tests:
    Total outstanding debt divided by 2019 earnings before interest, taxes, depreciation,
      and amortization (EBITDA) is less than 6; and
    Either 2019 EBITDA divided by 2020 projected debt service is greater than 1.5, or
      total outstanding secured debt divided by total existing tangible assets is less than 75
      percent.

   The maximum amount of unsecured loans to applicants that pass the above tests will be
   determined by the maximum amount of additional debt such applicant could incur before
   it would not pass the tests.

   The Treasury Department will contact loan applicants that do not meet the credit standards
   and therefore are ineligible for loans.


ELIGIBILITY

2. Should applicants also apply for a loan from a bank participating in the Federal
   Reserve’s Main Street Lending Program (MSLP)?

   Some businesses that applied for loans from Treasury will likely be better served by the
   Main Street Lending Program (MSLP), which the Federal Reserve established after the
   application deadline for Treasury’s loan program. Therefore, Treasury is encouraging
   applicants that appear to be eligible for a loan from a bank participating in the MSLP to
   first apply for such a loan. If these applicants do not receive such a loan, Treasury will
   consider their application for a loan based on Treasury’s credit standards. For applicants
   that do not appear to be eligible for a loan from a bank participating in the MSLP,
   Treasury will continue to process their application pursuant to Treasury’s credit standards.

3. Is there a minimum loan size for a loan from the Treasury Department?

   Yes. The minimum size of a loan from Treasury is $250,000. This minimum threshold is
   being imposed to avoid the administrative burdens and fixed costs associated with all
   loans, regardless of size, in the case of loans that provide relatively small economic
   benefits compared to larger loans.

4. Does the borrower have to be the legal entity that is eligible as a qualifying air
   carrier, MRO, or ticket agent, or can related corporate entities can be a borrower?

   The borrower must be a legal entity that is eligible for a Treasury loan under section
   4003(b)(1) or (2) of the CARES Act: specifically, a passenger air carrier; an eligible
   business that is certified under 14 CFR part 145 to perform inspection, repair, replace, or
   overhaul services; a ticket agent; or a cargo air carrier. However, a borrower’s parent
   company that directly or indirectly owns 100% of the equity of the borrower, or a
   borrower’s subsidiary in which the borrower directly or indirectly owns 100% of the
   equity, may be a co-borrower. Other affiliates of the borrower may be guarantors of the
   loan.

   All borrowers and guarantors will be jointly and severally liable for the loan obligation.
   In applying its credit standards, Treasury will take into account all co-borrowers and
   guarantors. However, in determining loan sizing, Treasury will consider only the
   operating expenses of the primary borrower.


TERMS AND CONDITIONS

5. Are there any restrictions on how borrowers can use loan proceeds?

   Yes. Loan proceeds must be used for general corporate purposes and operating expenses
   (including payroll, rent, utilities, materials and supplies, repair and maintenance, and
   scheduled interest payments on debt incurred before February 15, 2020), in each case in
   compliance with all applicable law.

   Loan proceeds may not be used for non-operating expenses, including capital expenses,
   delinquent taxes, and debt principal payments, unless the borrower can demonstrate, to
   Treasury’s satisfaction, that payment of any such non-operating expense is necessary to
   optimize the continued operations of the borrower’s business and does not merely
   constitute a transfer of risk from an existing creditor or investor to the federal government.

   The Treasury Department will provide additional guidance on terms and conditions on an
   ongoing basis.
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