Distressed companies risk shut out from US Fed’s loans


  • Corporate News
  • Friday, 03 Apr 2020

But the Federal Reserve doesn’t typically lend to insolvent borrowers – those who have trouble meeting their financial obligations or paying down debt when it comes due. That’s to protect against situations where companies access taxpayer or government funds, only to file for bankruptcy and leave the government with mounting losses.

NEW YORK: Troubled companies behind on their bills or already in bankruptcy may be out of luck when it comes to getting federal funds from the US stimulus package.

Current law blocks the government from making loans to companies that have either filed for Chapter 11 bankruptcy or fail an insolvency test, according to lawyers who’ve studied the new legislation. In that scenario, it would be nearly impossible for such borrowers to access financing from the Federal Reserve.

Some businesses angling for government relief “may discover a rude awakening” if those standards still applied to the new Coronavirus Aid, Relief and Economic Security Act, said Vincent Indelicato, a partner specialising in restructuring and bankruptcy law at Proskauer Rose. “This bill may not be the economic life preserver companies and their lenders were hoping for.”

The size of the US$2 trillion stimulus is unprecedented, surpassing the approximately US$800bil package that passed after the 2008 financial crash. The coronavirus plan provides about US$500bil in loans and assistance for big companies, provided they retain most of their employees and don’t buy back stock. Airlines are eligible for grants in exchange for giving the government equity stakes.

There is a separate pool of about US$350bil for small business loans, which won’t have to be paid back if used for staff compensation, mortgage interest and rent.

But the Federal Reserve doesn’t typically lend to insolvent borrowers – those who have trouble meeting their financial obligations or paying down debt when it comes due. That’s to protect against situations where companies access taxpayer or government funds, only to file for bankruptcy and leave the government with mounting losses.

Restrictions were put in place in 2015 after some companies bailed out under previous rescue packages wound up stiffing the federal government. In 2009, for example, middle-market lender CIT Group Inc filed bankruptcy less than a year after getting billions in federal aid, wiping out the preferred stock sold to the US Treasury.

Under the Federal Reserve Act, insolvency is determined by an inability to pay debts within 90 days before accessing a federal loan. How companies fit into the legislation passed by the Senate and House of Representatives last week remains a subject of debate, with business managers left to wonder how or if they qualify for relief.

Requests for comment from the US Treasury Department and Senate Majority Leader Mitch McConnell, the act’s sponsor, weren’t immediately returned.

“Companies in distress probably saw the US$500bil headline and imagined they caught the Hampton Jitney, ” Indelicato said, referring to the shuttle service to New York’s tony beach retreats. “But they may have already missed the bus, ” he said. “This is uncharted territory for everyone.”

If a company did get aid and files bankruptcy anyway, the federal loan would likely be treated the same as any other debt under Chapter 11 rules, said Amy Quackenboss, executive director of the American Bankruptcy Institute.

Firms that borrowed from business development companies (BDCs), a type of private credit lender, may be eligible for the relief, according to a recent report from Raymond James & Associates.

Some BDCs are actively examining how their portfolio companies can benefit from the stimulus package. In a recent note to shareholders, Bain Capital Specialty Finance (BCSF) Inc chief executive officer Michael Ewald said, “We are also actively pursuing opportunities for BCSF to benefit from the recently enacted CARES Act.” — Bloomberg

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