We summarize below some of the key provisions of Title IV of the Act, which appropriates another $500 billion to aid mid-sized and large businesses, the aviation industry and businesses “critical to maintaining national security.”
- The Act appropriates $500 billion for “programs or facilities” established by the Federal Reserve for “providing liquidity to the financial system that support lending to eligible businesses, States or municipalities” related to losses as a result of coronavirus, through loans or debt instruments.1
- While $46 billion is directed specifically to loans for the aviation industry and businesses “critical to maintaining national security,” the Act directs the Secretary of the Treasury to use up to the remaining $454 billion (plus any of the other $46 billion not otherwise used) for a program providing financing to banks and other lenders that provide loans to businesses, nonprofits, and state and local government, including specific direction to the Secretary of the Treasury to implement a program or facility for “mid-sized” businesses with between 500 and 10,000 employees.
- An “eligible business” under Title IV of the Act broadly includes any “United States business that has not otherwise received adequate economic relief in the form of loans or loan guarantees provided under this Act.”
- The Act authorizes the Treasury, working in large part through the Federal Reserve, to make loans and loan guarantees available to eligible businesses. For the $46 billion portion of the appropriated funds targeted for businesses in the aviation industry and businesses “critical to maintaining national security,” those businesses must, among other things, be “expected to incur covered losses such that continued operations of the business are jeopardized” as determined by the Treasury. For the $454 billion portion of the appropriated funds, an analogous standard applies in the case of the mid-sized business loan program that the Treasury is to endeavor to implement, namely that “the uncertainty of economic conditions as of the date of the application by the borrower makes necessary the loan request to support the ongoing operations of the recipient.”
- The goal of this provision is to unlock $2-4 trillion in private lending. Primarily, the loans to be made by the government under the Act are designed to be direct loans that are not permitted to be part of a private sector syndicated loan, a loan originated by a financial institution in the ordinary course of business, or a securities or capital markets transaction.
- Interest rates on direct loans to companies in the aviation industry or businesses “critical to maintaining national security” shall, to the extent practicable, not be less that an interest rate based on market conditions for comparable loans prevalent prior to the outbreak of COVID-19. In contrast to that, interest rates on direct loans to mid-sized businesses will need to reflect risk and market conditions but should not be higher than two percent per annum. No interest or principal payments on the mid-sized business loans will need to be made for at least six months, but this period can be extended at the discretion of the Treasury Department. However, loans cannot be forgiven.
- The Act specifies that the Treasury shall not make a loan or loan guarantee using the $46 billion portion of appropriated funds targeted for the aviation industry and businesses “critical to maintaining national security” unless: (1) in the case of a public company, the Treasury receives “a warrant or equity interest in the eligible business” or (2) in the case of an applicant that is not a public company, the Treasury receives either “a warrant or equity interest in the eligible business” or “a senior debt instrument issued by the eligible business.” With respect to any equity obtained, the Treasury “shall not exercise voting power.” The recipients of these loans to the aviation industry and businesses “critical to maintaining national security” are also subject to another section of the Act that imposes limits on the total compensation payable to their officers and employees.
Unlike the small business loan counterparts under Title I of the Act, the loans that will be made under the mid-sized business loan program come with some additional significant restrictive conditions. These include:
- In all cases, a borrower must agree that until the end of the 12-month period following repayment of any of these direct loans, it may not repurchase its own equity securities (if listed on a national securities exchange) or that of its parent company (if listed on a national securities exchange) or pay dividends or make other capital distributions on its common stock. The mid-sized business loan program provisions impose the dividend restriction only during the term of the loan and do not mention other capital distributions. However, this conflicts with the more general provision of Article IV of the Act that imposes such restrictions on all Fed programs and facilities under Article IV of the Act. It is unclear whether the dividend and capital distribution restrictions would apply to other forms of equity (such as partnership or LLC).
- The Act also freezes compensation increases for highly paid officers and executives of companies that receive a large business loan. In particular, borrowers are prohibited from increasing the compensation of any employee whose compensation exceeds $425,000 or from offering them significant severance or termination benefits.
- The funds received must be used to retain at least 90 percent of the recipient’s workforce at full compensation and benefits until September 30, 2020.
- The recipient must intend to restore not less than 90 percent of its workforce in place on February 1, 2020, and all compensation and benefits to its workers not later than four months after the end of the public health emergency related to COVID-19.
- The recipient cannot be a debtor in a bankruptcy proceeding.
- The recipient will not outsource or offshore jobs until two years after the loan is repaid.
- The recipient will not abrogate any collective bargaining agreements during the term of the loan and for a period of two years thereafter and will remain neutral in any union organizing effort during the term of the loan.
- The recipient must certify that it is a U.S.-domiciled business with significant operations and employees located in the U.S. (There is also a potentially conflicting requirement that the borrower must be created or organized in the U.S. or under the laws of the U.S. and have a majority of its employees in the U.S.) While there is no express prohibition on foreign ownership of an entity receiving the funding, we expect some limitations to be imposed.
The Act also calls on Treasury and the Fed to make funds available for small and medium-sized businesses, called the “Main Street Lending Program.” This program may further supplement the SBA loans authorized under Title I.
Those seeking Treasury funds should anticipate they will be subject to Congressional oversight and oversight from a specially created Inspector General. We expect Congress to launch investigations into funds provided, especially those perceived to be inappropriately granted. Similarly, borrowers may also be subject to Inspector General investigation or DOJ False Claim Act investigations, especially given the specificity of certifications that need to be made in order to obtain funds.
Given the broad powers and discretion given to the Treasury Department under these provisions, those wishing to obtain funding will need to also develop sophisticated political engagement strategies with the Trump Administration and Congress to support funding requests, as well as minimize the risk of future Congressional or DOJ scrutiny.
A variety of industry sectors should be eligible for funding. Companies in certain manufacturing industries, for example, are expected to pursue funding to help them produce daily essentials, repurpose facilities, and keep their workforce engaged.
We will be closely monitoring the roll-out of these programs and facilities and providing further guidance.
Pillsbury’s experienced crisis management professionals are closely monitoring the global threat of COVID-19, drawing on the firm’s capabilities in supply chain management, insurance law, cybersecurity, employment law, corporate law, finance and other areas to provide critical guidance to clients in an urgent and quickly evolving situation. For more thought leadership on this rapidly developing topic, please visit our COVID-19 (Coronavirus) Resource Center.
1. “States” include the District of Columbia, the territories and possessions of the United States, bi-State or multi-State entities and Indian Tribes. Interestingly, the term “coronavirus” is defined as “SARS-CoV-2 or another coronavirus with pandemic potential” and is thus not strictly limited to COVID-19. Both terms, “coronavirus” and “COVID-19” are used in the Act, and it is not clear if the distinction is always intentional.