CARES Act Authorizes Funding for Midsize Lending Program

Alerts / April 1, 2020

The Coronavirus Aid, Relief, and Economic Security Act (H.R. 748) (CARES Act), enacted on March 27, contains several debt financing provisions to provide economic stabilization and assistance to severely distressed sectors of the U.S. economy. One such provision is the Emergency Relief and Taxpayer Protections (§ 4003), whereby at least $454 billion is allocated to make loans and loan guarantees to and other investments in programs or facilities established by the Federal Reserve for the purpose of providing liquidity to the financial system that lends to eligible businesses.

A yet-to-be-determined portion of that $454 billion will be directed toward a midsize company loan program. The secretary of the Treasury will endeavor to provide financing to banks and other lenders, which in turn will make direct loans to businesses and nonprofit organizations with between 500 and 10,000 employees. We believe that the funds will be distributed through the Federal Reserve’s establishment of a Main Street business lending program.

In order to qualify, a potential borrower must:

  • Make the loan request in order to support its ongoing operations due to the uncertainty of economic conditions.
  • Retain at least 90% of its workforce, determined as of March 24, until Sept. 30 at full compensation and benefits.
  • Intend to restore at least 90% of its workforce that existed as of Feb. 1 and to restore all compensation and benefits to its workers no later than four months after the termination of the public health emergency caused by the COVID-19 outbreak.
  • Be domiciled in the U.S. with significant operations and employees in the U.S.
  • Not be a debtor in bankruptcy.
  • Not buy back stock or issue dividends while the loan is outstanding, except for buybacks required by a contractual obligation in effect prior to the CARES Act.
  • Not outsource or offshore jobs during the term of the loan plus two years after repayment.
  • Not abrogate existing collective bargaining agreements during the loan term plus two years after repayment.
  • Remain neutral in any union organization during the loan term.

Although full details regarding loan repayment terms are not yet available, the initial terms are attractive: Annual interest rates are capped at 2% and no principal or interest payments are due during the first six months after the loan is made (which period may be further extended by the secretary of the Treasury). While the provision states that no portion of the principal of a loan can be forgiven, it is uncertain at this time whether interest might be forgiven. It is also unclear what type of collateral will be required as security for the loans and the level of seniority that lenders making the loans will require.

We expect that these loans will be accessed through private lenders. Therefore, those interested in the program should contact their current lenders and encourage their participation in the program. We will continue to keep clients and friends of BakerHostetler apprised of important developments in this program as they arise.

Authorship Credit: Phillip M. Callesen and Robert W. Cordiak

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