April 2, 2020
The Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, provides some financial help to businesses across the United States. For small businesses (generally enterprises with 500 or fewer employees), the Act provides loans that may be forgiven under the Paycheck Protection Program, emergency loans on generous terms under the Small Business Administration’s Economic Injury Disaster Loan program and subsidies and modified terms on existing SBA-guaranteed loans. Businesses with more than 500 but fewer than 10,000 employees have to look elsewhere in the Act to find financial assistance.
For mid-sized businesses, the Act tries to help in two ways. First, it directs Treasury to support efforts of the Federal Reserve to provide credit support in the marketplace. Second, separate or in conjunction with such efforts, it directs Treasury to support the establishment of a Federal Reserve credit facility or program intended to provide credit to those businesses with more than 500 but fewer than 10,000 employees. The exact contours of this last effort have yet to be explicitly announced but certain requirements and characteristics are set forth in the Act.
Prior to the creation of the CARES Act, the Federal Reserve had already announced several programs to help the economy in response to the economic damage caused by the government response to the Coronavirus outbreak: the Primary Market Corporate Credit Facility; the Secondary Market Corporate Credit Facility; the Term Asset-Backed Securities Loan Facility; the Money Market Mutual Fund Liquidity Facility; and the Commercial Paper Funding Facility. The CARES Act directs the Treasury to use funds allocated to support these programs. To date, these programs have been implemented through the Federal Reserve Bank of New York. Other than the Primary Market Corporate Credit Facility, which provides loans to investment grade businesses experiencing economic distress, most of these programs appear to be aimed at stabilizing the credit markets rather than providing direct loans to mid-sized businesses.
In the coming days, the Treasury is expected to announce further details of programs to be implemented through the Federal Reserve in response to the provisions of Title IV of the CARES Act to use up to $454 billion to meet the needs of businesses. In addition, the Act allocates up to $46 billion to the Treasury Department to be used for direct loans and loan guarantees for the airline and national security industries.
Title IV allocates up to $454 billion (plus any unused funds of the additional $46 billion currently allocated to airlines and national security businesses), for loans and loan guarantees to, and other investments in, programs or facilities established by the Federal Reserve Board to provide liquidity to the financial system and support lending to eligible businesses, states and municipalities.
Section 13(3) of the Federal Reserve Act applies to these loans, including requirements relating to loan collateralization, taxpayer protection and borrower solvency.
Title IV directs the Secretary of the Treasury to endeavor to create a program to facilitate direct loans to eligible businesses (including nonprofit organizations) with between 500 and 10,000 employees. These loans are only available to U.S. businesses with significant operations and a majority of employees in the United States, which must also agree to prohibitions on purchases of their own equity and the payment of dividends. In addition, these loans are not eligible for forgiveness.
These mid-sized business loans have a maximum interest rate of 2% per annum and require no principal or interest payments for six months. Furthermore, these loans require applicants to certify:
In addition, these loans require that for the period until one year after the date the loan is no longer outstanding, any officer or employee with 2019 total compensation of over $425,000 cannot receive increased compensation for any 12-month period or receive severance pay or other termination benefits of more than twice his or her 2019 total compensation. Any officer or employee whose 2019 total compensation was more than $3,000,000 cannot receive compensation greater than $3,000,000 plus 50% of the amount by which his or her 2019 total compensation exceeded $3,000,000.
Prior to the enactment of the CARES Act, the Federal Reserve had announced that it expects to establish a Main Street Business Lending Facility to supplement efforts by the SBA to support lending to small- and medium-sized businesses. The Treasury and the Federal Reserve may decide to use this facility to implement the mid-sized business loan program mandated by the CARES Act. If this facility receives funding pursuant to the CARES Act, its borrowers would be subject to the restrictions described in this section.
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 In addition to the mid-sized business relief discussed in this memorandum, Title IV of the CARES Act allocates $46 billion to the Treasury Department to be used for direct loans and loan guarantees for airlines and related businesses and national security businesses, regardless of size.
These materials have been prepared for informational purposes only and are not legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Internet subscribers and online readers should not act upon this information without seeking professional counsel.