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.[1] The exact contours of this last effort have yet to be explicitly announced but certain requirements and characteristics are set forth in the Act.

Existing Federal Reserve Programs

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.

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.

Treasury and Federal Reserve Credit Facilities

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.

Who is Eligible?

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.

Terms and Conditions of the Loans

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:

1. the loan is necessary to support the ongoing operations of the recipient due to the uncertainty of economic conditions as of the date of the application;
2. loan proceeds will be used to retain at least 90% of its workforce, at full compensation and benefits, until September 30, 2020;
3. that it intends to restore at least 90% of its workforce as of February 1, 2020, and to restore all compensation and benefits to workers no later than four months after the termination date of the COVID-19 public health emergency;
4. that it is a U.S. company, domiciled in the United States with significant operations and a majority of its employees located in the United States;
5. that it is not a debtor in a bankruptcy proceeding;
6. that it will not pay dividends on its common stock or repurchase a listed equity security while the loan is outstanding unless pursuant to a contract in place prior to March 27, 2020;
7. that it will not outsource or offshore jobs for the loan term and two years thereafter;
8. that it will not abrogate existing collective bargaining agreements for the loan term and two years thereafter; and
1. that it will remain neutral in any union organizing effort for the loan term.

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.