Title IV, Division A of the CARES Act, specifically the Coronavirus Economic Stabilization Act of 2020 (“CESA”), provides $500 billion to the Treasury’s Exchange Stabilization Fund for loans, loan guarantees, and investments in the Federal Reserve’s lending facilities to support states, municipalities, and “eligible businesses.” Application procedures and minimum requirements for loans, loan guarantees, and other investments under CESA will be published by the Treasury Secretary within 10 days of the CARES Act’s enactment.
Eligible Businesses:
- Eligible businesses include air carriers, national security companies, and any U.S. business that has not otherwise received adequate economic relief in the form of loans or loan guarantees provided under the CARES Act.
- Notably, companies controlled (defined as a 20% or greater stake) by the President, Vice President, members of Congress and heads of executive departments, and any of the aforementioned position’s spouse, child, son-in-law, or daughter-in-law - are prohibited from receiving these loans.
Allocation of $500 Billion:
- CESA earmarks $25 billion for passenger air carriers; $4 billion for cargo air carriers; and $17 billion for businesses that work in national security.
- The remaining $454 billion (and any unused amounts in the above categories) are to be used for the benefit of businesses, States and municipalities. Specifically, these funds will go towards:
- Purchasing obligations or other interests directly from issuers of such obligations or other interests;
- Purchasing obligations or other interests in secondary markets or otherwise; or
- Making loans, including loans or other advances secured by collateral.
- Note, loans executed under CESA are not forgivable.
Specified Category of Loans and Loan Guarantees:
- CESA gives the Treasury Secretary discretion to make loans and loan guarantees to air carriers, cargo air carriers, and national security companies, for a duration no longer than five years and at an interest rate not less than prevailing market rates prior to the COVID-19 outbreak. Recipient businesses of these loans:
- Must not purchase its own publicly listed equity securities or of any parent company, except to the extent required under a contractual obligation in effect as of the date of the CARES Act’s enactment.
- Must not pay dividends or make other capital distributions with respect to its common stock;
- To the extent reasonably practicable, must maintain employment levels as of March 24, 2020 - through September 30, 2020, and in any case shall not reduce employment levels by more than 10% during such period; and
- Must be organized in the U.S. or under U.S. law and have significant operations in and a majority of its employees based in the U.S.
- Further, CESA provides that the Treasury Secretary will receive a warrant or equity interest in eligible businesses under this category of loans that have issued publicly traded securities, and a warrant or equity interest OR a senior debt instrument in eligible businesses who have not issued publicly traded securities.
- Also, Section 4004 of CESA provides that loan agreements for this category of loans must include that:
- No officer or employee of the recipient-business who received total compensation (including salary, bonuses, awards of stock, and other financial benefits) in excess of $425,000 in 2019 will receive total compensation which exceeds, during any consecutive 12-month period, the total compensation received during 2019;
- No officer or employee who received total compensation in excess of $425,000 in 2019 will receive severance pay or other benefits upon termination which exceed twice the amount of total compensation received during 2019;
- Any officer or employee who received over $3 million in total compensation during 2019 will not receive in excess of an amount equal to $3 million plus 50% of the excess over $3 million of total compensation received in 2019.
Broad Category of Loans and Loan Guarantees:
- For direct loans to businesses not in the industries specified in the immediately above-section, such recipients:
- Must not purchase its own publicly listed equity securities or of any parent company, except to the extent required under a contractual obligation in effect as of the date of the CARES Act’s enactment.
- Must not pay dividends or make other capital distributions with respect to its common stock;
- Must be organized in the U.S. or under U.S. law and have significant operations in and a majority of its employees based in the U.S; and
- Must comply with the same compensation limitations of Section 4004 as stated above.
- However, the Treasury Secretary can waive any of the above requirements to the extent it is necessary to protect the interests of the Federal Government.
- Further, section 13(3) of the Federal Reserve Act (providing various discounts), including those related to loan collateralization, taxpayer protection, and borrower solvency, shall apply to this category of loans.
- CESA mandates the Treasury Secretary implement programs that provide financing to banks and other lenders that make these direct loans to eligible businesses and nonprofit organizations with between 500 and 10,000 employees at interest rates of 2% or less.
- For the first 6 months, or longer if the Secretary so requires, no principal or interest shall be due or payable on these loans.
- Further, recipient-businesses of these loans must make a good faith certification (which contains some overlap with the requirements stated above) that:
- The loan is necessary to support ongoing operations;
- Funds received will be used to retain at least 90% of the recipient’s workforce, at full compensation and benefits, until September 30, 2020;
- It intends to restore not less than 90% of the workforce that existed as of February 1, 2020, and to restore all compensation and benefits to its workers no later than 4 months after the declared public emergency in response to COVID-19 terminates;
- It is domiciled and organized in (or under the laws of) the U.S. with significant operations and employees located therein;
- It is not a debtor in a bankruptcy proceeding;
- It will not pay dividends with respect to its common stock or repurchase publicly traded equity securities of itself or any parent company while the direct loan is outstanding, except to the extend required under a contractual obligation that is in effect as of the date of the CARES Act’s enactment;
- It will not outsource jobs or abrogate collective bargaining agreements for the term of the loan and two years after completing repayment of the loan; and
- It will remain neutral in any union organizing effort for the term of the loan.
- CESA encourages the Federal Reserve to establish a facility that supports lending to small and mid-size businesses and instructs the Treasury Secretary to “endeavor to seek the implementation of a program or facility” that “provides liquidity to the financial system that supports lending to states and municipalities.”
Oversight:
- CESA creates a role for a Special Inspector General for Pandemic Recovery (“Special Inspector”) and a five-person congressional oversight board (“Commission”) that will be responsible for selecting, confirming, investigating, and reporting on payments to companies.
- The Special Inspector will be within the Treasury Department, nominated by the President, and must be confirmed by the Senate.
- The House speaker and minority leader and Senate majority and minority leaders each will appoint one member of the Commission, and the chair will be appointed by both the House speaker and Senate majority leader.
- Specifically, the Special Inspector will be tasked with auditing and investigating the loans, loan guarantees and other investments made by the Treasury Secretary (and the justification for making them) under the programs of CESA.
- The Special Inspector shall issue reports once every calendar quarter beginning 60 days after the Special Inspector General is confirmed.
- The Special Inspector shall continue in its role until September 30, 2025.
- The Commission will be tasked with determining the impact and effectiveness of loans, loan guarantees, and investments made under CESA.
- The Commission shall issue reports every 30 days.
- The Commission is given the power to hold hearings and take testimony and is also scheduled to continue until September 30, 2025.
Reporting Relief:
- CESA requires reports to credit reporting agencies to show accounts as “current” even when there has been an account forbearance or agreement to modify payments on an account impacted by COVID-19. This will apply from January 31, 2020 through the later of 120 days after (i) enactment, or (ii) expiration of the national emergency declaration.
For more information or questions regarding Severely Distressed Sectors and other assistance for your business, email .
