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Treasury Defines “Businesses Critical to Maintaining National Security” – Eligible for Loans under the CARES Act

The CARES Act (enacted March 27, 2020) made available $17 billion for loans to businesses critical to maintaining national security to offset losses resulting from the coronavirus pandemic. The Act, however, did not define the key term “businesses critical to maintaining national security,” leaving companies in the defense and related sectors wondering about their eligibility for the loans. The U.S. Department of the Treasury has defined the term in a set of questions and answers released April 10, 2020.

The definition indicates that the loans will likely be made available to only a small set of traditional defense sector companies. It seems unlikely that eligibility will be extended more broadly, for instance, to other critical infrastructure sectors identified by the Department of Homeland Security. Though a broader set of companies may not be eligible for the $17 billion loan program, businesses that do not meet the criteria described below may be eligible for other types of assistance under the CARES Act, such as the Main Street Lending Program.

Definition of Businesses Critical to Maintaining National Security

A business eligible for a loan on the basis that it is “critical to maintaining national security” is one that, at the time of its application, is:

(1) performing under a DX-priority rated contract or order under the Defense Priorities and Allocations System (“DPAS”) regulations; or

(2) operating under a valid top secret facility security clearance under the National Industrial Security Program regulations.

Additional businesses may be considered for the $17 billion loan program if the Secretary of the Treasury determines that the businesses are critical to maintaining national security. These determinations would be based on recommendations and certifications by the Secretary of Defense or the Director of National Intelligence that the businesses are critical to maintaining national security.

The two explicit criteria identified by Treasury – DX-priority rated contract or top secret facility security clearance – apply to a limited number of companies performing important government contracts. The fact that qualification under the third criterion is controlled by the Secretary of Defense or the Director of National Intelligence indicates that it is unlikely to be applied broadly enough to reach companies beyond the core defense sector.

The DPAS regulations are administered by the Department of Commerce’s Bureau of Industry and Security. The purpose of the DPAS regulations is to ensure the timely availability of “industrial resources” to meet national defense and emergency preparedness requirements. The regulations provide for the rating of certain government contracts and orders as “DX” or “DO.” Commerce has delegated authority to the Departments of Defense, Homeland Security, and Energy to place priority ratings on their contracts in accordance with the DPAS regulations.

Only the Defense Department is currently authorized to use the DX rating, which is reserved for contracts with the highest national defense urgency. DX-priority rated programs are approved by the Secretary of Defense or the Deputy Secretary of Defense and are used in support of a limited number of specific programs. As of November 2018, the list of programs with DX status included the National Reconnaissance Program, the Integrated Ballistic Missile Defense System, certain Presidential helicopter and aircraft programs, the B-2 Bomber and others.

The National Industrial Security Program ensures that U.S. defense companies safeguard the classified information in their possession while working on government contracts, programs, bids, or research and development efforts. The Defense Counterintelligence and Security Agency (“DCSA”) administers the program on behalf of the Department of Defense and thirty-three other federal agencies, including the Department of Homeland Security, NASA, and the Nuclear Regulatory Commission. According to DCSA, there are about 13,000 contractor facilities cleared for access to classified information. Only a fraction of those are cleared for access to top secret information.

Conditions for the Loans

Treasury is preparing further guidance and application materials for loans under the $17 billion program. Once applications are available, an eligible business will be able to apply for a loan directly from the Treasury Department. In addition to the criteria discussed above, to be eligible, a business must be created or organized in the United States or under the laws of the United States and have significant operations in, and a majority of its employees based in, the United States.

A business receiving a loan under the $17 billion program will be required to agree to a number of conditions, including:

  • Issuance to the Treasury Secretary of a warrant or other equity interest or, under certain circumstances, a senior debt instrument;
  • No buy-backs of listed securities until one year after the loan is repaid;
  • No dividend payments on common stock until one year after the loan is repaid;
  • Maintaining certain employment levels; and
  • Restrictions on executive compensation.

Unlike the Paycheck Protection Program loans under the CARES Act, the principal amounts of loans made under this separate program will not be forgiven.

We continue to monitor the various forms of assistance available to businesses under the CARES Act. Please visit our Coronavirus: Preparation & Response series for additional resources we hope will be helpful.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.