A Summary of Title IV Lending Programs

Title IV of the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) is aimed at providing financial assistance to industries and businesses that have been impacted by the COVID-19 pandemic. The provisions of Title IV are intended to offer a financial lifeline to distressed businesses by (i) directly supporting aviation and national security businesses and (ii) supporting programs or facilities established by the Board of Governors of the Federal Reserve System for purposes of providing liquidity to the financial system that supports lending to other “eligible businesses” (Federal Reserve Programs). Much of the relief authorized under Title IV comes with significant implications for a business’s future operations that will require serious board-level consideration. While the establishment of Federal Reserve Programs to be supported by Title IV of the CARES Act largely remains pending, potential relief seekers should begin to familiarize themselves with the different forms of relief anticipated under Title IV and the known restrictions that are attached to each.

Section 4003(b) of the CARES Act authorizes the Secretary of the Treasury Department (Treasury) to make up to $500 billion of loans and loan guarantees. Of this $500 billion, $46 billion has been earmarked for direct loans and loan guarantees for passenger air carriers and related businesses ($25 billion), air cargo carriers ($4 billion) and businesses important to the maintenance of national security ($17 billion). Initial guidance has already been provided by Treasury with respect to the specific direct relief for these earmarked industries.

This alert is focused on the remaining $454 billion of authorized funds under Section 4003(b)(4) of the CARES Act to be made available to:

“make loans and loan guarantees to, and other investments in, programs or facilities established by the Board of Governors of the Federal Reserve System for the purpose of providing liquidity to the financial system that supports lending to ‘eligible businesses’, States or municipalities by: (A) purchasing obligations or other interests directly from issuers of such obligations or other interests; (B) purchasing obligations or other interests in secondary markets or otherwise; or (C) making loans, including loans or other advances secured by collateral.”

Accordingly, Section 4003(b)(4) relief for non-earmarked industries is not structured as direct relief from Treasury to eligible businesses, but rather as additional financing and support to Federal Reserve Programs that provide liquidity to the financial system that supports lending to “eligible businesses.”

An “eligible business” for purposes of Section 4003(b)(4) of the CARES Act is: 

a business “created or organized in the United States” that has been unable to receive adequate economic relief in the form of loans or loan guarantees under other provisions of the CARES Act, has significant operations in the United States and has a majority of its employees in the United States.

Given the US employee restriction, further guidance is needed to determine if creditworthy entities comprising US divisions of larger international conglomerates (headquartered in the US or otherwise) can take advantage of relief available under Federal Reserve Programs receiving support pursuant to Section 4003(b)(4).

The principal amount of loans made under a Federal Reserve Program is not eligible for forgiveness, including the principal amount of loans made under the Mid-Size Program (discussed below). Section 4003(b)(4) does not explicitly prohibit reduction of interest amounts due under a Federal Reserve Program. 

Overview of Mid-Size Business Program and Restrictions and Main Street Lending Program

A subset of Section 4003(b)(4) provides for the Secretary of the Treasury to seek to establish a specific Federal Reserve Program that provides financing to banks and other lenders that make direct loans to eligible businesses (including, to the extent practicable, nonprofit organizations) that have between 500 and 10,000 employees (the Mid-Size Program). While no formal Federal Reserve Program has been established to date, Title IV of the CARES Act does not expressly contain the Small Business Administration affiliation rules applicable to most borrowers under Title I of the CARES Act.

When established, the Mid-Size Program may be attractive to qualifying businesses as loans issued under the Mid-Size Program will have interest rates capped at no more than 2 percent per annum and will not require payment of interest or principal for the first six months of the loan (or such longer period as determined by the Secretary of the Treasury). In order to receive a loan under the Mid-Size Program, a borrower must make a good faith certification that: 

(a) the loan is necessary to support ongoing operations of the business due to the continuing economic uncertainty;

(b) proceeds of the loan will be used to retain at least 90 percent of its current workforce, with full compensation and benefits, through September 30, 2020;

(c) the borrower intends to restore at least 90 percent of its workforce (as of February 1, 2020), with full compensation and benefits, no later than four months after the national public health emergency related to COVID-19 is terminated;

(d) the borrower is domiciled in the United States with significant operations and the majority of its employees located in the United States (we note that this requirement appears to be duplicative to the general requirement that recipients of Section 4003(b)(4) meet the same test);

(e) the borrower is not a debtor in an ongoing bankruptcy proceeding;

(f) the borrower will not pay dividends in respect of common stock or buy back its own stock, unless prior contractual obligations exist, for the term of the loan;

(g) the borrower will not outsource or offshore jobs for the term of the loan plus two additional years;

(h) the borrower will not abrogate existing collective bargaining agreements for the term of the loan plus two additional years; and

(i) the borrower will remain neutral in any union organizing effort for the term of the loan.

As noted above, when established, the Mid-Size Program could be an attractive option for distressed businesses looking for access to a low-interest loan that requires little up-front cost. However, potential borrowers under the Mid-Size Program should carefully analyze the restrictions that will be placed on their future operations as well as the covenants to restore their employee base within four months of the end of the declared national health emergency.

The CARES Act additionally clarifies that it does not intend for the Mid-Size Program to limit the Federal Reserve System’s ability to establish, at its discretion, a “Main Street Lending” program designed to support lending to small and mid-size business consistent with Section 13(3) of the Federal Reserve Act. The requirements of the Mid-Size Program would not necessarily apply to any such Main Street Lending program if it is established by the Federal Reserve System.

Federal Reserve Act Section 13(3) Restrictions Under Section 4003(b)(4) 

Section 13(3) of the Federal Reserve Act permits emergency lending to bank and nonbank companies by the Federal Reserve System. As part of its “taxpayer protection” features, Section 13(3) requires that loans are sufficiently collateralized with a “lendable value” assigned to collateral and require borrowers to meet a minimum solvency requirement. Section 4003(b)(4) expressly requires that these “taxpayer protection” features of Section 13(3) shall apply to any Federal Reserve Program receiving loans, loan guarantees or other investments from the Treasury pursuant to Section 4003(b)(4).

Direct Lending Restrictions Under Section 4003(b)(4)

Under Section 4003(b)(4) Treasury can only make loans, loan guarantees or other investments in Federal Reserve Programs that make direct loans to eligible businesses if the applicable eligible businesses agree to: 

(a) a prohibition on stock buybacks (of equity securities listed on a national securities exchange of the eligible business or any parent company of the eligible business), unless prior contractual obligations exist, until one year after the direct loan has been paid in full;

(b) a complete restriction on divided payments or capital distributions in respect of common stock of the eligible business until one year after the direct loan has been paid in full; and

(c) comply with the employee compensation limits set forth in Section 4004 (discussed below).

The Secretary of the Treasury can waive any or all of the restrictions on direct loans with respect to any Federal Reserve System program or facility if, in the Secretary’s discretion, such a waiver is necessary to protect the interests of the federal government. The Secretary of the Treasury is required to be available to testify before the Senate Banking, Housing and Urban Affairs Committee and the House Financial Services Committee for each such waiver he authorized.

Restrictions on Employee Compensation

Section 4003(c)(3)(A)(III) of the CARES Act provides that all Federal Reserve Programs providing direct loans and receiving Treasury support under Section 4003(b)(4) of the CARES Act, potentially including the Mid-Size Program, require restrictions on employee compensation for borrowers. These restrictions last for the term of any direct loan plus one year and are as follows: 

(a) no officer or employee whose total compensation was greater than $425,000 in 2019 can receive pay increases or be offered severance or other benefits that exceed more than two times their maximum compensation received in 2019; and

(b) no officer or employee whose total compensation was greater than $3,000,000 in 2019 can receive compensation in excess of (i) $3,000,000, plus (ii) 50 percent of the amount by which such person’s 2019 compensation exceeded $3,000,000.

Other Federal Reserve Programs

Guidance has not been issued on what additional facilities or programs will qualify as Federal Reserve Programs under Section 4003(b)(4). An example of a Federal Reserve lending facility that has already been established is the Primary Market Corporate Credit Facility (the PMCCF). To be clear, the PMCCF was established prior to Section 4003(b)(4) but we are providing a brief overview of the PMCCF as an illustrative example of a Federal Reserve lending facility while it remains unclear if the investment received in PMCCF by the Treasury will be counted as Section 4003(b)(4) funds. The PMCCF was established by the Federal Reserve Bank of New York on March 23, 2020, with an initial $10 billion investment from the Treasury’s Exchange Stabilization Fund (a preexisting fund that was established in 1934). The stated purpose of the PMCCF is to (i) purchase qualifying bonds from eligible issuers and (ii) provide loans to eligible issuers. In order to qualify as an “eligible issuer” under the PMCCF, a business must be headquartered in the United States with material operations in the United States and not expect to receive direct financial assistance under pending federal legislation (the CARES Act was pending at the time the PMCCF was established). Loans or bond repurchases under the PMCCF are subject to the following conditions and requirements:

(a) the eligible issuer must be rated at least BBB-/Baa3 by a major nationally recognized statistical rating organization (NRSO), and if rated by multiple major NRSOs, rated at least BBB-/Baa3 by two or more NRSOs, in each case subject to review by the Federal Reserve; and

(b) the loan or bond must have a maturity of less than four years.

The PMCCF also includes limits on loans and bond repurchases based on an eligible issuers’ existing outstanding debt over the trailing 12 months. Interest rates for loans and bond repurchases under the PMCCF will be informed by market conditions. Again, it is important to note that the PMCCF is not a program that has been included under Section 4003(b)(4) but we have included a discussion of it here as an illustrative example of a Federal Reserve facility.

Next Steps

Potential relief seekers should be prepared to evaluate the various Federal Reserve Programs that are established and receive support under Title IV and consider whether or not they offer solutions or assistance that is appropriate for their situation. The CARES Act requires the Treasury to release guidance within 10 days of signing related to the industry-specific (airlines, air-cargo and national security) relief programs but does not place a deadline on guidance for the rest of Title IV or the establishment of Federal Reserve Programs. Because of this, a specific timeline cannot yet be established for when any Federal Reserve Program, including the Mid-Size Program, will be implemented or when a Main Street Lending Program might be unveiled. Businesses interested in seeking relief should continue to evaluate the options available under Title IV as part of their broader strategy while awaiting the necessary guidance and establishment of Federal Reserve Programs.