| Item 1.01. | Entry into a Material Definitive Agreement |
The information included pursuant to Item 2.03 is incorporated by reference into this Item 1.01.
| Item 2.03. | Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant |
On January 15, 2021, Southwest Airlines Co. (the “Company”) entered into definitive documentation with the United States Department of Treasury (“Treasury”) with respect to funding support pursuant to Subtitle A of Title IV of Division N of the Consolidated Appropriations Act, 2021 (the “PSP Extension Law”). Funds received under the PSP Extension Law must be used to pay qualifying Employee salaries, wages and benefits through at least March 31, 2021. The Company’s expected aggregate receipts under the program total $1,727,370,400, for which the Company expects to provide Treasury consideration in the form of a promissory note in an amount equal to $488,211,120 and of warrants to purchase up to an aggregate of 1,054,907 shares of the Company’s common stock, subject to adjustments by Treasury pursuant to the terms of the PSP Extension Law in each case. Funds are expected to be disbursed to the Company in multiple installments.
On January 15, 2021, the Company entered into a payroll support program extension agreement (the “PSP Extension Agreement”) with Treasury, pursuant to which the Company will receive payroll support funding (“Payroll Support”) under the PSP Extension Law. On January 15, 2021, the Company received $863,685,200, or 50 percent, of the total expected Payroll Support (the “Initial Payroll Support”) pursuant to the PSP Extension Agreement. Pursuant to the PSP Extension Agreement and the PSP Extension Law, in connection with the receipt of Payroll Support, the Company is subject to certain restrictions, including prohibitions against involuntary furloughs and reductions in employee pay rates and benefits from the date of the PSP Extension Agreement through March 31, 2021; the elimination of share repurchases and dividends through March 31, 2022; and limits on executive compensation until October 1, 2022.
As consideration for the Payroll Support, on January 15, 2021, the Company issued a promissory note (the “Note”) in favor of Treasury and entered into a warrant agreement with Treasury (the “Warrant Agreement” and together with the PSP Extension Agreement and the Note, the “Payroll Support Documents”), pursuant to which the Company agreed to issue warrants (each, a “Warrant”) to purchase common stock of the Company to Treasury. In connection with the disbursement of the Initial Payroll Support on January 15, 2021, the Note was issued in an initial amount of $229,105,560, and the Company issued a Warrant to purchase up to 495,042 shares of common stock. Upon each subsequent disbursement of Payroll Support to the Company under the PSP Extension Agreement after January 15, 2021, (i) the principal amount of the Note will automatically be increased in an amount equal to 30 percent of any such disbursement and (ii) the Company will issue an additional Warrant to Treasury in an amount equal to 10 percent of the principal amount of the increase to the Note in connection with such disbursement of Payroll Support, divided by the strike price of $46.28 (which was the closing price of the Company’s common stock on December 24, 2020).
The Note matures in full on January 15, 2031, and is subject to mandatory prepayment requirements in connection with certain change of control triggering events that may occur prior to its maturity. The Company 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 percent before January 15, 2026 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 percent. 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 or designate a resale shelf registration statement for the Warrants and the underlying shares of common stock. The Company 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 $46.28 per share of common stock and will expire on the fifth anniversary of the issue date of such Warrant. Warrants will be settled through net share settlement or net cash settlement, at the Company’s option. The Warrants include adjustments for below market issuances, payment of dividends and other customary anti-dilution provisions. The Warrants do not have voting rights.
