Southwest Airlines announced has reached a final agreement with the United States Department of Treasury about the general terms expected on the Payroll Support Program under the Coronavirus Aid, Relief and Economic Security Act (CARES Act).
On April 20, 2020, the Company entered into definitive documentation with Treasury with respect to funding support as part of the Payroll Support Program. Funds received under the Payroll Support Program will be used to pay Employee wages and benefits through at least September 30, 2020.
Southwest’s expected disbursements under the program total $3,259,181,720, consisting of $2,311,427,204 in direct payroll support and a $947,754,516 unsecured term loan, subject to adjustments by Treasury pursuant to the terms of the CARES Act.
In addition, warrants to purchase up to an aggregate of 2,598,724 shares of common stock of the Company will be issued to the Treasury in proportion with the direct payroll support and loan disbursements. Funds are expected to be disbursed to the Company in four instalments from April to July 2020.
As compensation for Payroll Support, on Southwest issued a promissory note to the Treasury and entered into a warrant agreement with Treasury which it agreed to issue warrants to purchase stock.
In connection with the disbursement of the Initial Payroll Support on April 21, 2020, the note was issued at an initial amount of $458,877,258 and Southwest issued a warrant to purchase up to 1,258,232 shares of common stock.
Upon each subsequent disbursement of Payroll Support to the Company under the PSP Agreement after April 21, 2020, the principal amount of the note will be increased in an amount equal to 30% of any such disbursement and the firm will issue a warrant to Treasury in an amount equal to 10% of the principal amount of the increase.
The note matures in full on April 19, 2030, and is subject to mandatory prepayment requirements in connection with certain change of control triggering events that may occur prior to its maturity. Southwest has an option to prepay the note at any time without premium or penalty.
Amounts outstanding under the note bear interest at a rate of 1.00% before April 20, 2025 and, afterwards, at a rate equal to Secured Overnight Financing Rate (SOFR) or other benchmark replacement rate consistent with customary market conventions plus margin of 2.00%.
The Note contains customary representations and warranties and events of default.
The Warrant Agreement sets out the Company’s obligations to issue Warrants in connection with disbursements of Payroll Support and to file a resale shelf registration statement for the Warrants and the underlying shares of common stock.
Southwest has also granted Treasury certain demand underwritten offering and piggyback registration rights with respect to the warrants and the underlying common stock.
Each warrant is exercisable at a strike price of $36.47 per share of common stock and will expire on the fifth anniversary of the issue date of such warrant. The warrants do not have voting rights.