CARES ACT: $500 Billion Loan Program for US Businesses

Practical Law Legal Update w-024-7990 (Approx. 6 pages)

CARES ACT: $500 Billion Loan Program for US Businesses

by Practical Law Finance

Coronavirus Economic Stabilization Act of 2020 (CESA)

The Coronavirus Economic Stabilization Act of 2020 (CESA), at Title IV, Subtitle A of the CARES Act, authorizes the Secretary of the Treasury (the Secretary) to establish and administer a $500 billion program of loans, loan guarantees, and other investments to provide funding across many sectors of the US economy, including:

Public and private companies.
Nonprofits.
State and municipal governments.
Certain targeted business sectors consisting of:
- air carriers and related businesses, including repair, inspection, and ticket agent services;
- air cargo carriers; and
- businesses critical to national security.

The purpose of this financing is to provide liquidity to eligible businesses, States, and municipalities, related to losses incurred as a result of coronavirus (Section 4003(a)).

CESA Program

Section 4003(b) of CESA allocates the $500 billion as follows:

Up to $46 billion of loans and loan guarantees in the amount of:
- up to $25 billion to passenger air carriers and related businesses, including repair, inspection, and ticket agent services (Section 4003(b)(1));
- up to $4 billion to air cargo carriers (Section 4003(b)(2)); and
- up to $17 billion to businesses critical to national security (Section 4003(b)(3)).
Up to $454 billion of loans, loan guarantees, and other investments in programs or lending facilities established by the Board of Governors of the Federal Reserve System (Federal Reserve) to provide liquidity to the financial system, which in turn supports lending to eligible businesses, States, or municipalities (Section 4003(b)(4)).

The Secretary is given wide discretion to set the terms of these investments, subject to guidelines and restrictions set out in CESA. The statute authorizes the Secretary to:

Use up to $100 million to pay the costs and administrative expenses of these programs.
Take steps to administer these programs, including:
- hiring employees;
- entering into service contracts;
- establishing entities to purchase, hold, and sell assets; and
- issuing regulations and other guidance required to carry out these programs.

The Secretary is required to issue his guidance within ten days of the statute's enactment, or April 6, 2020.

Two general conditions apply to all financing provided under the CESA program:

All businesses receiving assistance must certify that:
- they are created or organized under the laws of the US;
- have significant operations in the US; and
- have a majority of their employees based in the US.
The principal amount of any loan or loan guarantee shall not be reduced through loan forgiveness (Section 4003(d)(3)).

$454 Billion of Investments in Federal Reserve Programs and Facilities

Section 4003(b)(4) provides $454 billion of loans, loan guarantees, and other investments in support of Federal Reserve programs or facilities that provide liquidity to the financial system. In addition, any unused amounts under paragraphs (1), (2), and (3) are available to fund this part of the CESA program. The liquidity provided by the Federal Reserve under this program will in turn support lending to businesses, States, and municipalities by purchasing their obligations or other interests either directly or in the secondary markets, or by making loans, including loans secured by collateral.

Restrictions on Businesses

A business that receives a loan, loan guarantee, or other investment under this program must agree that while the loan is outstanding and for a period ending 12 months after it is repaid:

Not to repurchase any of its stock or the stock of any affiliate listed on a national exchange.
Not to pay any dividends or other capital distributions with respect to its common stock.
To comply with the employee compensation limitations set out in Section 4004.

The compensation limitations in Section 4004 provide that during the period covered by the agreement:

For employees whose total compensation (salary, bonuses, stock, and other financial benefits) in 2019 exceeded $425,000:
- total compensation in any 12-month period may not exceed the employee's 2019 compensation; and
- any severance and other termination benefits may not exceed twice the employee's 2019 compensation.
For employees whose total compensation in 2019 exceeded $3 million, total compensation in any 12-month period may not exceed the sum of:
- $3 million; and
- 50% of the amount by which 2019 compensation exceeded $3 million.

CESA gives the Secretary latitude to waive these restrictions on a determination of necessity, but requires the Secretary to make himself available to testify to Congress regarding the reasons for the waiver.

Assistance for Mid-Sized Businesses

Under the Section 4003(b)(4) program with the Federal Reserve, the Secretary will implement a financing program under which banks and other lenders will make direct loans to eligible businesses and nonprofits with 500 to 10,000 employees on the following terms:

The annualized interest rate of the loan is not higher than 2% per annum.
No principal or interest payments for the first six months, or longer at the Secretary's discretion.
The borrower must make a good faith certification that:
- economic conditions make the loan necessary;
- the funds will be used to retain at least 90% of its workforce with full compensation and benefits until September 30, 2020;
- it intends to restore at least 90% of its workforce as of February 1, 2020, and intends to restore full compensation and benefits to these workers within four months of termination of the public health emergency by the Secretary of Health and Human Services;
- it is not in bankruptcy;
- it will not pay dividends with respect to its common stock or repurchase any of its stock or the stock of any affiliate listed on a national exchange while the loan is outstanding;
- it will not outsource or offshore employment until at least two years after the loan is repaid;
- it will not abrogate existing collective bargaining agreements for a period ending two years after repayment of the loan; and
- it will remain neutral in any union organizing efforts during the term of the loan.

Main Street Lending Program

CESA, under the Section 4003(b)(4) program, also permits, but does not require, the Federal Reserve to establish a "Main Street Lending Program" or similar program that supports lending to small and mid-sized businesses on terms and conditions consistent with Section 13(3) of the Federal Reserve Act (12 U.S.C. § 343(3)), including any program in which the Secretary makes a loan, loan guarantee, or other investment (Section 4003(c)(3)(D)(ii)).

Government Participants

Finally, under the Section 4003(b)(4) program with the Federal Reserve, the Secretary will implement a program or facility that provides liquidity to the financial system to support lending to States and municipalities (Section 4003(c)(3)(E)).

$46 Billion of Loans to Air Carriers and Businesses Critical to National Security

Section 4003(b) authorizes the Secretary to make loans and loan guarantees:

Up to $25 billion to passenger air carriers and related businesses, including repair, inspection, and ticket agent services.
Up to $4 billion to air cargo carriers.
Up to $17 billion to businesses critical to national security.

This program makes loans and loan guarantees available to applicants if the Secretary determines that:

Credit is not reasonably available to the applicant.
The intended financing is prudently incurred by the applicant.
The intended financing is adequately secured or is made at a rate that:
- reflects the risk of the loan or loan guarantee; and
- to the extent practicable bears an interest rate that is not less than rates for comparable obligations prior to the COVID-19 outbreak.
The duration of the debt is no longer than five years.
The applicant agrees that it will not repurchase any of its stock or the stock of any affiliate listed on a national exchange until at least 12 months after the loan is repaid.
The applicant agrees that it will not pay any dividends or other capital distributions with respect to its common stock until at least 12 months after the loan is repaid.
The applicant agrees to comply with the employee compensation limitations set out in Section 4004.
The applicant agrees to maintain its employment level as of March 24, 2020, to the extent practicable, but in any event no lower than 90%.
The applicant certifies that it:
- is created or organized under laws of the US;
- has significant operations in the US; and
- has a majority of its employees based in the US.
The applicant has incurred covered losses (directly or indirectly as a result of COVID-19) that jeopardize its continued operation.

The Secretary may not issue any loan or loan guarantee under this program unless:

For public companies or entities, the US receives warrants or equity interests in the business.
For nonpublic entities, the US receives warrants or equity interests or senior debt instruments issued by the business.

The Secretary may not exercise any voting power with respect to shares of common stock acquired under this authority.

Section 4005 authorizes the Secretary of Transportation to require air carriers receiving loans or loan guarantees under this program to maintain scheduled air service from before the COVID-19 outbreak deemed necessary by the Secretary of Transportation. This determination must take into account:

The needs of small and remote communities.
The need to maintain health care, medical device, and pharmaceutical supply chains.

Section 4006 requires the Secretary of the Treasury and the Secretary of Transportation to coordinate in carrying out this program.

CARES ACT: $500 Billion Loan Program for US Businesses | Practical Law