Troubled companies behind on their bills or already in bankruptcy may be out of luck when it comes to getting federal funds from the U.S. stimulus package, Bloomberg News reported. 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 apply to the new Coronavirus Aid, Relief and Economic Security Act, said Vincent Indelicato, a partner specializing 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 $2 trillion stimulus is unprecedented, surpassing the approximately $800 billion package that passed after the 2008 financial crash. The coronavirus plan provides about $500 billion 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 $350 billion 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. 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 U.S. Treasury.
