The CARES Act is the federal government’s third legislative package in response to the COVID-19 pandemic. Enacted March 27, roughly one-fourth of the Act’s overall $2.2 trillion in spending is allocated to the Treasury Department’s Exchange Stabilization Fund to provide liquidity to distressed businesses and sectors impacted by COVID-19. The $500 billion fund is intended for entities that are too large to benefit from Small Business Administration (SBA) loan opportunities, such as the newly created paycheck protection program under the 7(a) loan program.

The Act authorizes the Treasury Secretary to make loans, loan guarantees, and other investments in eligible entities subject to appropriate covenants, warranties, and requirements. The principal amount of an obligation issued by a business, State, or municipality under these programs is not eligible for loan forgiveness.

This summary describes funding under Section 4003 and focuses on $454 billion made available to entities through the Federal Reserve in the form of direct lending, assistance to mid-sized businesses, and the Main Street Lending Program. The Treasury Department and the Fed may issue further guidance clarifying these provisions in the days and weeks ahead.

Airlines and National Security

The Act provides $46 billion in assistance to passenger and cargo air carriers, related aviation services, and businesses deemed critical to national security. The Treasury Department must publish application procedures and minimum requirements governing this lending within 10 days of the law’s enactment. [1] These criteria may include stipulations on the duration of loans, stock buybacks and dividends, worker retention, and U.S. corporate presence and domestic employment. The Act also includes measures to protect the government’s financial exposure and states that the Treasury Secretary may not issue a loan or loan guarantee unless it obtains warrants, senior debt, or equity in eligible businesses receiving loans.

Federal Reserve Lending Facilities

Subsection (b)(4) directs that at least $454 billion in the fund will be available to the Federal Reserve (the Fed) to support lending to eligible businesses, States, or municipalities (referred to here as (b)(4) entities). The Fed will administer this assistance through lending facilities in accordance with Section 13(3) of the Federal Reserve Act. Section 13(3) programs and facilities must comply with requirements relating to loan collateralization, taxpayer protection, and borrower solvency issued through previous federal rulemaking.

Entities receiving assistance from the Fed’s 13(3) programs or facilities that provide direct loans are subject to specific terms and conditions. Eligible businesses under this provision must agree to:

• Refrain from stock buybacks for one year after the loan is no longer outstanding, except as required by any contractual obligations in effect as of March 27, 2020;

• Pay no dividends or other capital distributions for one year after the loan is no longer outstanding;

• Comply with limits on employee compensation. The following limits will be effective from the date of loan execution until one year after the loan is no longer outstanding:

  • Officers or employees earning more than $425,000 in 2019 may not receive a raise, or severance benefits totaling more than twice their 2019 compensation

  • Officers or employees earning more than $3 million in 2019 may not earn more than $3 million plus half the amount of their compensation in excess of $3 million

  • Total compensation includes salary, bonuses, award of stock, and other financial benefits provided by an eligible business.

However, the Secretary may determine that a waiver of these requirements is necessary to protect the interests of the federal government.

Assistance for Mid-Sized Businesses

The CARES Act states that the Treasury “shall endeavor to seek the implementation of a [Federal Reserve] program or facility” that provides financing to lenders making direct loans to businesses with 500 to 10,000 employees and, to the extent practicable, nonprofits of the same size. These loans would be subject to a maximum annualized interest rate of two percent per annum with no principal or interest due and payable for the first six months, or longer, at the discretion of the Secretary. Additionally, borrowers applying for a loan under this program must make a good-faith certification that:

• The uncertain economic conditions at the date of loan application make the loan necessary to support ongoing operations;

• Until September 30, 2020, the loan will be used to retain at least 90 percent of the borrower’s workforce at full compensation and benefits;

• The borrower intends to restore at least 90 percent of its workforce as of February 1, 2020. It additionally must certify to restore all worker compensation and benefits within four months of expiration of the current public health emergency (declared January 31, 2020);

• The borrower is an entity domiciled in the U.S. with significant U.S.-based operations and employees, or created or organized in the U.S. with a majority of its employees based domestically;

• The borrower is not a debtor in a bankruptcy proceeding;

• The borrower will not pay stock dividends or purchase stock buybacks while the direct loan in outstanding, except if required under a contractual obligation in effect as of March 27, 2020;

• The borrower will not outsource or offshore jobs for the loan duration and for two years after completing loan repayment;

• The borrower will not abrogate existing collective bargaining agreements for the loan duration and for two years after completing loan repayment, and will remain neutral in any union organizing effort for the loan duration.

Main Street Lending Program; Government Participants

The statute makes reference to other lending avenues for mid-sized businesses, stating that nothing “shall limit the discretion of [the Fed] to establish a Main Street Lending Program or other similar program or facility that supports lending to small and mid-sized businesses,” including any (b)(4) program under the Act. On April 1, the Federal Reserve Bank of Boston commented that the Main Street Lending Program was “still in the design phase” and “another couple” of weeks away. This announcement followed a March 23 press release from the Fed stating that it would soon unveil the program as a complement to SBA lending activities.

The Act contains similar language regarding eligible public beneficiaries of lending, stating that the Treasury Department “shall seek to endeavor” implementation of a program or facility under (b)(4) that supports lending to States and municipalities.

Section 4003 authorizes the Treasury Secretary to designate financial institutions as financial agents of the United States to perform all reasonable duties the Secretary determines are necessary to respond to COVID-19. These financial institutions include, but are not limited to, depositories, brokers, and dealers, and would be reimbursed for their services.

Exchange Stabilization Fund ($500 billion)

$454 billion: Federal Reserve Programs and Lending Facilities

$46 billion: Airlines, National Security

Loans and loan guarantees

• Stipulations on loan duration, stock buybacks and dividends, worker retention, and U.S. corporate presence and domestic employment

• Credit must not be reasonably available, the intended obligation is prudently incurred, and the loan or loan guarantee rate sufficiently reflects risk

• Treasury may not issue a loan or loan guarantee unless it receives warrants, senior debt, or equity in eligible businesses receiving loans

Loans, loan guarantees, and other investments

• Subject to terms and conditions of Section 13(3) of the Federal Reserve Act, such as loan collateralization, taxpayer protection, and borrower solvency

1)   Facilities making direct loans. Mandates additional requirements, such as limitations on stock buybacks, dividends, and employee compensation

2)   Lending to Mid-Sized Businesses. States that Treasury “shall endeavor” to implement a lending program for businesses of 500 to 10,000 employees that provides financing to lenders who make direct loans. Requires borrowers to submit good-faith certifications.

• Main Street Lending Program. Clarifies that establishment of a mid-sized business lending program does not limit the discretion of the Fed to create a Main Street Lending Program.

[1] On March 30, the Treasury Department published guidance on payroll support to aid airline industry employees and on loans to airline industry and businesses critical to national security, see here.