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CARES Act National Security Loans Available to a Limited Number of Defense Contractors

April 30, 2020

The US Department of the Treasury recently began accepting loan applications from qualifying Defense Industrial Base contractors, with a short deadline of May 1, 2020, 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 for certain eligible businesses that have not otherwise received adequate economic relief under the CARES Act. This authorization includes the provision of up to $17 billion in aggregate loans and loan guarantees to “businesses critical to maintaining national security.” Such loans are available to offset covered losses incurred directly or indirectly as a result of the coronavirus pandemic.

On April 27, Treasury began accepting national security loan applications from borrowers via a web-based portal. Because the application has a deadline of 3:00 pm EDT on May 1, 2020, for review, eligible companies should prepare and submit their applications as soon as possible to ensure consideration.[1]

ELIGIBILITY

The CARES Act leaves most aspects of the national security loans to the discretion of the Secretary, including which businesses qualify as “critical to maintaining national security.” On March 30, Treasury issued guidance that generally limits such businesses to ones that, at the time of the loan application, are:

  • performing under a “DX”-priority rated contract or order under the Defense Priorities and Allocations System (DPAS) regulations in 15 CFR part 700; or
  • ·operating under a valid top secret facility security clearance (FCL) under the National Industrial Security Program regulations in 32 CFR part 2004.

A rated order is a prime contract, a subcontract, or a purchase order issued under the authority of the Defense Procurement Act of 1950 that, by law, must be filled on a priority basis, notwithstanding existing commercial and unrated government orders. Rated orders are assigned one of two levels of priority – DO or DX – established by regulation. As set forth in the regulation, DX rated orders have equal priority with each other and take preference over DO rated orders and unrated orders. Most rated orders are lower-rated DO orders, and a contractor who is performing only DO and unrated orders will not be eligible for CARES Act national security loan assistance under the rated-order prong of the eligibility test.

Read our LawFlash on the Defense Production Act, Rated Orders & the FCA: Long-Term Liability Amid a Current Crisis?

The other type of eligible business deemed “critical to maintaining national security” is one holding a Top Secret facility 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 DCSA at the Confidential, Secret, or Top Secret level. Only Top Secret FCLs render the contractor eligible for a national security loan under the CARES Act.

Finally, in addition to the criteria above, discretionary loans are available to entities that do not meet either the rated-order or the 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 business is critical to maintaining national security, the Secretary of the Treasury determines that the applicant business is critical to maintaining national security.

REQUIREMENTS

Several important requirements have been placed on borrowers as a condition to receiving national security loans under the CARES Act. As set forth in the Treasury guidance, in order to receive a loan, a borrower must agree to the following:

  • It will maintain employment levels as of March 24, 2020, to the extent practicable, and will not reduce its employment levels by more than 10% from the levels on such 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 that is listed on a national securities exchange, unless obligated to do so under a contract in effect as of March 27, 2020
  • The borrower will not pay dividends or make other capital distributions with respect to its common stock until 12 months after the borrower has repaid the loan

Furthermore, borrowers must agree to two separate limits on compensation paid to officers and employees receiving total compensation for calendar 2019 exceeding $450,000 and $3 million, which remain in effect until 12 months after the loan is repaid.

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

APPLICATION

The application form requests detailed financial and organizational information, and should be reviewed as soon as practicable. It will likely take some time to complete. Applicants will need to provide a description of all current debt and what collateral and lien priorities are available to secure the requested loan. The form also requires applicants to document losses expected from COVID-19 and their plans for adjusting to the crisis, including any plans related to employment changes.

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

Also, potential borrowers should note that the certification at the end of the form appears to be made in the officer’s individual capacity, under penalty of perjury.

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CONTACTS

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Dallas/Washington, DC
Sheila A. Armstrong

Washington, DC
Stephen E. Ruscus
Katelyn M. Hilferty

Boston
Christopher L. Melendez

Philadelphia
Andrew Budreika
Benjamin Stango



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