Certain provisions of the Coronavirus/Covid-19 economic stimulus legislation are subject to the issuance of government regulations and other government action, thus certain details regarding the legislation may be clarified or added.
The Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”)provides up to $500 billion in liquidity to financial markets in the form of loans, loan guarantees and investments to and in eligible businesses, which assistance comes with some noteworthy limitations on future activities of recipients.
To an extent, specifics such as who can apply for assistance, the application process, and the form and terms of assistance have been “punted” to the Secretary of the Treasury for subsequent development – with initial application procedures and requirements to come within ten days of enactment. However, the CARES Act does make clear that the Federal Reserve expects to both: (1) make direct loans and investments in businesses (likely on favorable economic terms, but as determined on a case-by-case basis reflecting the risk of loss to the Treasury and, in some cases, requiring recipients provide equity warrants for the Federal Reserve to participate in upside), and (2) provide substantial liquidity to banks and other lenders who make available to mid-sized businesses inexpensive (under 2.0%) loans with no amortization for at least six months. No loan forgiveness would be permissible under a Federal Reserve lending facility.
As to eligibility criteria generally, CARES Act assistance is limited to US businesses whose continuing operations are jeopardized by COVID-19, and which businesses agree to limitations on stock repurchases, dividends, layoffs and, in some cases, executive compensation. For Private Equity and Fund clients, restrictions on dividends, share repurchases, and executive compensation (discussed further below) may limit the attractiveness of assistance under Federal Reserve programs. For Corporate clients under less pressure to return capital to shareholders, and which may have greater flexibility around executive compensation and share buybacks, assistance may be more practically available for those with COVID-19 related economic distress.
More specific eligibility criteria under the CARES Act initially centers on the type of business conducted by a potential recipient.
- Up to $46 billion of the CARES Act’s funds are earmarked for loans and loan guarantees to (1) passenger air carriers and related FAA regulated inspection, repair and ticketing services, (2) cargo air carriers and (3) businesses critical to maintaining national security ((1) – (3) the “Specified Eligible Businesses”).
- Eligibility and use for the remaining $454 billion of funds under the CARES Act is subject to a very broad mandate – generally, these funds are for loans and loan guarantees to, and other investments in, programs or facilities to be established by the Board of Governors of the Federal Reserve System for the purpose of providing liquidity to the financial system that supports lending to eligible businesses, States or municipalities (the “Federal Reserve System Programs and Facilities”).
Federal Reserve System Programs and Facilities
Eligibility of borrowers and investment recipients in this category will largely be determined in the actual programs and facilities to be established after enactment of the CARES Act. However, an eligible business must in all cases be created or organized in the US or under US laws, have significant operations in the US, and have a majority of its employees based in the US.
In addition to general authorization and funding to develop Federal Reserve System Programs and Facilities, the CARES Act includes requirements for: (x) programs or facilities providing direct loans to recipients (other than Specified Eligible Businesses) and (y) the establishment of a program to provide liquidity to lenders providing assistance to mid-sized businesses, each as described in greater detail below.
Direct Loan Assistance
Borrower eligibility to receive any direct loans (i.e. bilateral loan agreement entered directly with a borrower) under Federal Reserve System Programs and Facilities will, at a minimum, require the eligible business to agree to the following:
(1) during the term and for 12 months after, prohibition on repurchasing its shares, or those of any parent company, to the extent listed on a national securities exchange (except under a prior contractual obligation);
(2) during the term and for 12 months after, prohibition on paying dividends on common stock; and
(3) during the term and for 12 months after: (i) employees earning more than $425,000 in calendar year 2019 cannot be paid more in any 12 month period than they were paid in calendar year 2019 and (ii) employees earning more than $3 million in calendar year 2019 cannot be paid more in any 12 month period than $3 million plus 50% of the amount in excess of $3 million they earned in calendar year 2019.
Mid-Sized Businesses Liquidity Program
The Act also requires the Secretary of the Treasury (the “Secretary”) to implement a program to provide assistance to mid-sized businesses by providing liquidity to banks and other lenders that make direct loans to businesses with between 500 and 10,000 employees. Such direct loans by such banks and other lenders must (x) be made at an annualized interest rate that is not higher than 2.0%, and (y) not require repayment of principal or interest for at least 6 months (or longer if the Secretary determines).
A mid-sized business’s eligibility under this program further requires it to satisfy the following conditions (among others to be specified in the program):
- loan is necessary to support ongoing operations in light of uncertainty of economic conditions;
- funds will be used to retain at least 90% of recipient’s workforce, at full compensation and benefits, until at least September 30, 2020;
- recipient intends to restore not less than 90% of its workforce as of February 1, 2020, no later than four months after termination of the public health emergency in response to COVID-19;
- recipient is not a debtor in a bankruptcy proceeding;
- during the term of the loan, recipient (i) will not pay dividends on common stock or repurchase its stock or that of any parent on a national exchange and (ii) will remain neutral in any union organizing effort; and
- during the term of the loan and for 2 years after, recipient will not (i) outsource or offshore jobs, or (ii) abrogate any existing collective bargaining agreement.
Specified Eligible Businesses (Air Carriers and National Security Businesses)
The Secretary is responsible for publishing procedures and minimum requirements for Specified Eligible Businesses to apply for assistance within ten (10) days after enactment of the CARES Act. As is the case with Federal Reserve System Programs and Facilities, an eligible business must in all cases be created or organized in the US or under US laws, have significant operations in the US, and have a majority of its employees based in the US. Certain additional generally applicable requirements are provided by the CARES Act, as described below.
Agreements for these loans and loan guarantees must provide that the eligible business:
- is prohibited from repurchasing its shares, or those of any parent company, to the extent listed on a national securities exchange (except under a prior contractual obligation), during the term and for 12 months after;
- is prohibited from paying common stock dividends during the term and for 12 months after; and
- will agree to maintain employment levels as of March 24, 2020, to the extent practicable, and in any case not reduce employment by more than 10% from the levels on such date, in each case until at least September 30, 2020.
In addition, the Secretary must determine for these loans and loan guarantees that:
- credit is not reasonably available to the applicant;
- the obligation by applicant is prudently incurred;
- security is either sufficient or loan is provided at a rate that would have been market given available security prior to the COVID-19 outbreak;
- the term is as short as practicable, up to a maximum of 5 years; and
- the otherwise eligible business incurred or is expected to incur losses, incurred directly or indirectly as a result of coronavirus, such that the continued operations of the businesses are jeopardized.
Finally, loans and loan guarantees for Specified Eligible Businesses require that the Secretary receive, (1) in the case of publically traded business, warrants or equity interests in the business or (2) in the case of businesses that are not publically traded, either warrants or equity interests, or a senior debt instrument if warrants or equity interests are not feasible. The warrants or equity interests are to be “designed” to provide for reasonable participation in equity appreciation or interest rate premium, as the case may be. The Secretary will expressly not be permitted to exercise any voting power with respect to shares of common stock acquired from warrants and direct equity grants.
Generally Applicable Provisions and Commentary
Legal and Financial Terms – Generally, all legal terms (e.g. covenants, R&W, reporting/audit requirements, etc.) for loans to be made under the CARES Act are as determined “appropriate” by the Secretary. Interest rates of loans are as determined by the Secretary based on the risk and current average yield on outstanding marketable obligations of the US of comparable maturity.
Reporting and Oversight – Section 4018 of the CARES Act establishes an office of Special Inspector General to assist with administration and oversight of loans and investments made pursuant to the CARES Act. This Special Inspector General is tasked with gathering general information relevant to oversight, including listings of eligible businesses receiving assistance, Secretary’s explanation for each loan or loan guarantee (including justification of the price paid for and other financial terms associated with the transaction), and current principal, interest and collateral relating to each loan or loan guarantee. Confidentiality of information prepared by this Special Inspector General should not be assumed.
Conflicts of Interest – Businesses which are 20% or more owned, directly or indirectly, by the President, the Vice President, heads of an Executive department or member of Congress, or any of their respective immediate family, are not eligible for assistance under the CARES Act. Section 4019 of the CARES Act requires the CEO and CFO of each eligible business seeking to receive aid under the CARES Act to certify that this prohibition is not being violated by receipt of any loan, loan guarantee or other investment.
 The CARES Act’s financial assistance through the Federal Reserve System is one of two programs included in the CARES Act, the other being a loan program known as the “Paycheck Protection Program” administered by the US Small Business Administration. A summary of the Paycheck Protection Program has been prepared by Lowenstein Sandler LLP in a separate document.
 Concepts like “workforce”, what it means to “retain” the applicable percentage of a workforce, and parameters for “restoration” of a workforce under the following subsection (3) are not provided for in the CARES Act and will require additional detail from the Secretary of Treasury and Federal Reserve System as they implement the CARES Act.