Can Latin American companies benefit from US paycheck protection?
Small and medium-sized Latin American companies with US operations could be eligible for help from the US government’s paycheck protection programme, part of the CARES Act passed in response to the covid-19 pandemic. But while the programme has its benefits, the pool of Latin American SMEs eligible to take part is limited and, for those that do, there are potential risks involved.
A law has been passed by US President Donald Trump that could benefit Latin Americans. That is not a typo.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was approved by the US Congress and subsequently signed into law by Trump on 27 March. The US$2 trillion economic relief package aims to provide fast and direct economic assistance to US companies. One of the measures within the act is the paycheck protection programme, which is offering some US$350 billion to small US businesses in the form of government-guaranteed loans.
A window of opportunity
Any company, for profit or non-profit, that employs workers in the US can potentially qualify for the US’ paycheck protection programme. This means Latin American companies with operations in the US may be eligible. The loan cannot be spent on any employees or operations outside of the US, but for a Latin American company with operations in the US it could relieve some of the stress on the company’s overall budget, allowing for resources to be distributed to areas of the business most in need.
The US programme has the potential to help small Latin American businesses with US operations in need. The loan provides a low-cost form of financing that helps companies retain employees and meet certain financial obligations during this disrupted period. “The purpose of the paycheck protection programme is to enable small businesses to maintain their payroll and operations during the covid-19 crisis by essentially giving them the money to do so,” says Linklaters counsel Jacques Schillaci.
Mayer Brown partner Andrew Kugler describes the loan as “providing a lifeline to small businesses” impacted by covid-19, which, if it meets certain criteria, does not have to be paid back. “The application and approval process are also pretty straightforward, with lenders authorised to process applications so the money can flow to small businesses faster,” he adds.
The beauty of the loan is that it grants economic relief for almost nothing in return. Companies that qualify can receive loans of up to two-and-a-half times their average monthly payroll. The loan itself is potentially forgivable – it won’t necessarily have to be paid back. The company does not have to pay back any amount of the loan used on paying its employees’ wages, mortgage interest, rent and utilities bills during the eight weeks after it receives the funds, as long as at least 75% is used for payroll purposes.
The proportion of the loan that gets written off reduces if the business’ US branch lays off staff or reduces net wages by more than 25% (unless it rehires and restores all wages by 30 June).
Any part of the loan that is not written off will have to be paid back over a two-year period at an interest rate of 1% – a very low rate. “Payments of principal and interest are deferred for the first six months, although interest accrues during this period,” says Kugler. “There are ongoing discussions that may alter these terms, including potentially extending the loan term to five years.”
The US Congress is discussing other possible changes to the rules surrounding the loan and how it gets paid back. If legislation changes, companies may have longer than eight weeks to use the loan before it can potentially be written off, and they may reduce the requirement that 75% of the loan must be used for payroll purposes. The deadline for rehiring redundant staff or increasing previously reduced staff wages might also extend beyond 30 June – there has been talk that the date will move to September or even December this year. "This is a fast developing area and may be subject to further changes by the Congress, Treasury Department and or the Small Business Association," says White & Case LLP partner Taisa Markus.
Read the small print
But the programme does come with some drawbacks. For starters, the number of Latin American companies who fit the criteria is likely to be limited. The loan is only available to a very specific segment of Latin American companies, which limits the extent of its positive impact on the broader market. Only those companies with US operations are eligible – and even then, there are further criteria that limit the programme’s accessibility.
The programme is specifically intended for small and medium-sized companies as these are the businesses that tend to lack access to other financing like capital markets. It is solely for businesses that employ no more than 500 employees, which includes all affiliates and subsidiaries both inside and outside of the US. "The language of the act does not prohibit loans to US subsidiaries of foreign entities. However, [government agency Small Business Administration's] recent clarification on the number of employees test to include all employees globally across an applicant’s affiliates has substantially limited the availability of PPP loans to such entities," says White & Case partner Edward So.
There are some exceptions; certain industries, such as automotive manufacturers, can qualify with up to 1,500 employees and hotels, restaurants and other franchises can apply for the scheme if they have less than 500 employees at each physical location of their business.
Employees aren’t the only numbers to consider. To be eligible for the programme, companies must also have a tangible net worth of no more than US$15 million and an average net income for the past two fiscal years of no more than US$5 million.
Many Latin American incorporated companies with US operations are majority-owned by foreign (non-US) nationals; this will not disqualify them, but the US management of the business must have been at the company for at least a year before the loan application and the US management team must include US citizens or verified lawful permanent residents.
Anticipate other risks
Even for those that do fit the bill, there are other issues to consider. There is a legal risk, explains Mayer Brown’s Kugler, surrounding confusion about the required certification of “economic necessity” that a company has to provide to obtain the loan. “The application requires a borrower to certify that current economic uncertainty makes the loan request necessary to support the ongoing operations of the business. However, the rules and guidance on this certification have shifted over the last month, which has caused confusion and anxiety over how it will be evaluated in subsequent audits,” says Kugler, adding that loans above US$2 million will be subject to a mandatory audit before any loan forgiveness can be granted.
It is unclear whether the audit would consider just US operations, or the whole Latin American company and all its affiliates. "The key thing to consider here is, does a company have significant other capital sources available to them, since this loan is for SMEs that have an economic necessity,” poses Cleary Gottlieb Steen & Hamilton LLP partner Rich Lincer. “But then, you might have companies applying for the loan and arguing that they might have liquidity now, but they soon won’t, given their cash burn. What constitutes economic necessity is still unclear.”
Under the conditions of the loan, if applicants use the funds to purchase products and equipment they are expected to purchase only those items that have been produced in the US “to the extent that it’s feasible”. This requirement is open to interpretation – there is no timeframe given for how long companies are expected to buy products or equipment made in the US – and it might leave applicants nervous. Committing to buying US products could end up costing the company more than it can afford; it is unclear who determines “what is feasible” and who decides if a company breaks this requirement and subsequently loses its right to have its loan written off.
Businesses in the US have complained that they would appreciate more flexibility in terms of when and how they can spend the loan for it to remain forgivable. Due to widespread lockdowns and self-quarantine measures, most businesses have been forced to close and are not yet ready to reopen. They would like to be able to spend the loan when they are back open and operating again.
There’s also the question of reputational risk. Some public and private companies in the US and in Latin America have been heavily scrutinised by the media for taking government bailouts during the pandemic. Recipients of the paycheck protection programme could also come under fire. While media attention has so far focused on large corporations receiving government aid, it could extend to small and medium-sized companies.
Making false or incorrect claims during the loan process can result in civil penalties or even criminal liability, so it is important that companies applying for the paycheck protection programme make sure their application is as watertight as possible. For US companies that are affiliates of Latin American companies, the added complication of this foreign ownership means they have to be extra careful in reaching all the requirements. If problematic applications lead to disputes, they could end up costing companies more than the programme is worth. Given the financial difficulties many businesses face right now, this is to be avoided at all costs. “Accordingly, it is imperative that Latin American companies considering these loans for their US subsidiaries consult with legal counsel regarding the details of all the requirements,” says Arnold & Porter counsel Arturo Caraballo.
Although the pool of Latin American SMEs eligible to benefit from the programme is limited, for those that do, it could represent a lifeboat. “Companies should be analysing their corporate structures carefully to see if they can benefit from this programme,” says Cleary Gottlieb attorney Katherine Hughes. “While we wait to see if programmes are rolled out or how the existing financial relief programs evolve, it’s a case of watch this space.”