In response to the coronavirus economic shock, Congress just passed and we expect President Trump to sign into law, a massive, unprecedented economic stimulus package designed to bridge the economy through this extraordinary period.

This plan will be helpful to shallow the economic damage that has already been incurred, and will likely continue to be inflicted, until the outbreak subsides. Major provisions included in the $2 trillion package are discussed below.

Cash to Individuals

There is $290 billion that will go directly to consumers. Rebates of $1,200/$500 (adults/ children) will be available in full to all non-dependents with a social security number with adjusted gross income below $75,000/$150,000 (single/joint) but will phase out at a 5% rate thereafter. The rebates should be available to tax filers via direct deposit within three weeks but will take four to five weeks for non-filers.

Unemployment insurance will also see a massive expansion. It sets up a temporary “Pandemic Unemployment Assistance” program through the end of the year for those not previously covered (self-employed, gig workers, those who can’t work because of the coronavirus), increases funding for states, increases unemployment compensation by an additional $600 per week per person for those in the pandemic program (for up to four months), and makes other changes. As a result, laid-off workers are generally eligible for roughly half of their weekly wages for up to 39 weeks and may receive an additional $600 per week on top of that. For many workers this results in complete (in some cases more than complete) wage replacement.

This should go a long way to support consumers that have had their livelihood disrupted.

Substantial Support for Small Businesses

The bill has about $350 billion in loans for small businesses and nonprofits with 500 or fewer employees (with some exceptions). Franchisees in the food and accommodation industry (specifically NAICS code 72) with 500 and fewer employees at a physical location are eligible for loans.

The maximum loan is $10 million with the important provision that a portion of the loan can be forgiven. Businesses can get a subsidy that equals the cost of their payroll, mortgage or rent payments, and utility costs for the first eight weeks after receiving the loan—a massive cash infusion for small business. These low interest loans will provide important liquidity for small employers.

The loan forgiveness is tied to maintaining company payrolls. To the extent a business has reduced its payroll, the amount a loan could be forgiven would be proportionately reduced. Businesses that have cut their payrolls could get loan forgiveness if they restored their payrolls when they get the loan. This is a major incentive for business to keep employees.

Substantial Support for Big Business

The bill will provide $454 billion to the Federal Reserve’s Exchange Stabilization Fund (ESF) for loans, loan guarantees, and funds for the Fed’s lending facilities aimed at helping larger businesses, states, and municipalities. These funds could be levered at a ratio of 10:1, so potential lending under this program could be in the neighborhood of $4.5 trillion. Some of these funds will also back lending facilities intended to support small businesses. The $454 billion will be used to cover the costs associated with loans that default.

Industry Specific Relief

Cash grants in order to cover payroll costs will be provided to passenger airlines ($25 billion), air cargo carriers ($4 billion), and contractors such as food service providers ($3 billion). Through the Fed’s ESF, the legislation would also provide the airlines and cargo carriers with an equivalent amount in loans and loan guarantees. An additional $17 billion would be set aside for direct lending to businesses deemed important to maintaining US national security (which is widely believed to be Boeing). This support comes with restrictions such as limits on executive pay, buybacks, dividends, and payroll retention requirements. The legislation also allows the Treasury to take an equity stake in the companies.

Large businesses would receive a tremendous amount of liquidity, important for companies directly impacted by the crisis that would otherwise probably face onerous financing terms.

Corporate Tax Relief

The package includes a suspension of the 80% net operating loss (NOL) limitation, allows carry backs on losses from 2018-2020 for up to 5 years, delays the 6.2% employer-side payroll tax by making it payable over two years (half due 12/31/21 and the remainder due 12/31/22), includes an employee retention credit against payroll taxes (for 50% of wages paid for the first $10,000 in compensation), loosens the net interest deductibility limitation by raising the threshold from 30% of EBITDA to 50% of EBITDA in tax years beginning in 2019 and 2020, makes prior AMT credits refundable, suspends aviation taxes, and includes a technical correction from the 2017 tax law for qualified investment property (QIP). Appropriations: The bill includes $340 billion in appropriations, the vast majority of which is devoted to hospitals and the public health effort (about $180 billion). Other funds that are disbursed tend to help various government funded institutions such as schools, airports, transportation, etc. deal with changing circumstances due to the coronavirus threat. Some of the appropriations also shore up existing food security programs. 

Coronavirus Relief Fund

This provision makes $150 billion available to states, territories, and tribal governments in order to defray the costs of the coronavirus response and to compensate for lost revenues due to the slowdown in economic activity. The funds are allocated based on population size and are disbursed at a minimum of $1.25 billion.

This stimulus package is in addition to all of the aggressive moves by the Federal Reserve over the past few weeks. The Fed has innovated substantially over the past week; on Monday the Fed moved into lending directly to the broader economy and not just to banks. In addition, it shifted to unconstrained security purchases on an as-needed basis, as well as revived old and added new lending facilities to the alphabet soup of market-support programs. These measures are already easing financial stresses that have developed as a result of the crisis.

It is encouraging to see this rapid response to the crisis and these measures should ultimately stabilize the economy and financial markets. We anticipate volatility will persist until there are signs that efforts to contain the virus are successful. We are in favor of maintaining a conservative investment profile until we see stabilization in economic and financial market indicators.

This situation obviously remains very fluid – stay tuned for future communications as circumstances evolve.

Disclaimer
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This report is provided for informational purposes only and shall in no event be construed as an offer to sell or a solicitation of an offer to buy any securities. The information described herein is taken from sources which we believe to be reliable, but the accuracy and completeness of such information is not guaranteed by us. The opinions expressed herein may be given only such weight as opinions warrant. This Firm, its officers, directors, employees, or members of their families may have positions in the securities mentioned and may make purchases or sales of such securities from time to time in the open market or otherwise and may sell to or buy from customers such securities on a principal basis.

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