Midsize Business Loan Program: Coronavirus Economic Stabilization Act

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President Trump signed the CARES Act (the “Act”) on Friday, March 27, 2020. The Paycheck Protection Program ( the “PPP”) included in the Act has garnered much of the public’s attention to date. An Interim Final Rule related to the PPP was issued by the Small Business Administration on April 2, 2020. With the marquee piece of the Act now moving forward, attention has turned to other aspects of the Act.

This Alert focuses on Title IV of the Act, also referred to as the Coronavirus Economic Stabilization Act of 2020. Title IV of the Act provides $500 billion to Treasury’s Exchange Stabilization Fund to provide liquidity to eligible businesses, states and municipalities. The $500 billion is broken down to two categories:
1. $46 billion: Designated to provide direct loans for a short list of distressed, industry-specific companies, including air carriers and businesses critical to maintaining national security (collectively, the “B (1)-(3) Funds”).
2. $454 billion: Designated for loans, loan guarantees and investments in support of eligible businesses, states and municipalities (collectively, the “B (4) Funds”).

Title IV of the Act directs the Treasury Secretary to implement a program that provides financing to banks and other lenders that make direct, low-interest (maximum 2.00%) loans to eligible businesses, including, to the extent practicable, nonprofit organizations (the “Midsize Business Loans”). The Midsize Loans are independent of loans issued under the PPP. Payments on any Midsize Business Loan will be deferred for a period of 6 months (or longer at the Treasury Secretary’s discretion) but are not forgivable.

Below is a summary of the provisions relating to the Midsize Business Loans. It is anticipated the U.S. Department of Treasury and the Federal Reserve Board will provide guidance on the Midsize Business Loans within the next two weeks. Guidance related to the B (1)-(3) Funds is required by Monday, April 6th, at which point the Department of Treasury will shift its focus to the B (4) Funds. SUCH GUIDANCE WILL PROVIDE FURTHER DETAIL ON THE ADMINISTRATION OF THE B (4) FUNDS AND MAY MATERIALLY CHANGE THE SUMMARY BELOW. If the process to obtain B (4) Funds is anything like the process to obtain a PPP loan, we recommend clients contact their primary banking relationship soon to be included on the distribution of any updated Midsize Business Loan requirements.

OVERVIEW OF MIDSIZE BUSINESS LOAN
Midsize Business Loans may be provided to (i) “eligible businesses” and (ii) nonprofit organizations (to the extent practicable), with between 500 and 10,000 employees. (Sec. 4003(c)(3)(D)(i)). “Eligible businesses” are defined to include:
1. Air carriers (though such amount is limited); or
2. a United States business “that has not otherwise received adequate economic relief in the form of loans or loan guarantees provided under Act.” (Sec. 4002(4)).
Such businesses must have been (i) created or organized in the United States or under the laws of the United States and (ii) have significant operations in and a majority of its employees based in the United States. (Sec. 4003(c)(3)(C)).

REQUIREMENTS OF MIDSIZE BUSINESS LOAN APPLICANT
Conditions (unless waived by the Treasury Secretary):
1. Dividends. The borrower will be prohibited from paying dividends or making other capital distributions on its common stock during the term of the loan, and for a year after the date the loan is no longer outstanding (Sec. 4003(c)(3)(A)(ii)(I));
2. Stock Buybacks. The borrower cannot make stock buybacks of equity securities of the borrower, or any parent of borrower, that are listed on a national securities exchange (except to the extent required by a preexisting contract), during term of the loan, and for a year after the date the loan is no longer outstanding (Sec. 4003(c)(3)(A)(ii)(I)); and
3. Employee Compensation. The borrower must agree to cap all employee compensation (including salary, stock, and bonuses) for a period ending one year after the loan is repaid as follows:
    a. Employees receiving more than $425,000 per year cannot receive (i) more compensation than they received in 2019 (except for compensation determined through a collective bargaining agreement entered into prior to March 1, 2020) or (ii) severance pay or other benefits upon termination greater than twice the 2019 compensation amount. (Sec. 4003(c)(3)(A)(ii)(III) referencing Sec. 4004(a)(1)).
    b. Officers or employees receiving more than $3 million per year cannot receive total compensation in excess of (i) $3 million plus (ii) 50% of the excess over $3 million. (Sec. 4003(c)(3)(A)(ii)(III) referencing Sec. 4004(a)(2).

• Certifications by Borrower:
1. Impact of COVID-19. The uncertainty of economic conditions as of the date of the application makes necessary the loan request to support the ongoing operations of the recipient;
2. Intent to Maintain Compensation. Funds will be used to retain at least 90% of the borrower’s workforce, at full compensation and benefits, until September 30, 2020;
3. Intent to Maintain Workforce. The borrower 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 the workers of the borrower no later than 4 months after the termination date of the public health emergency in response to COVID-19;
4. Domestic Status. The borrower is (i) created or organized in the United States, (ii) domiciled in the United States, and (iii) has significant operations and a majority of its employees based in the United States;
5. No Bankruptcy. The borrower is not a debtor in a bankruptcy proceeding;
6. No Outsourcing. The borrower will not outsource or offshore jobs for the term of the loan and 2 years after completing repayment;
7. Collective Bargaining Obligations. The borrower will not abrogate existing collective bargaining agreements for the term of the loan and 2 years after; and
8. Neutral in Organizing Efforts. The borrower will remain neutral in any union organizing effort for the term of the loan (Sec. 4003(d)(2)(D)(i)(I)-(X)).

OTHER BORROWER CONSIDERATIONS IN TITLE IV
• Additional eligibility restrictions are likely to be included in forthcoming regulations.
• There is no process available today to apply for a Midsize Business Loan. Regulations are in the process of being prepared that will implement the program, but the Act does not include a specific timeline for the launch of this particular program. All Midsize Business Loans under Section B (4) must be made prior to December 31, 2010.
• The Midsize Business Loan requirements currently do not include any specific conditions related to prudential considerations (i.e., borrower’s ability to pay back the loan), minimum amounts of collateral, or limitations on uses of loan proceeds. Such conditions (or others) may be added as the Treasury Department and the Federal Reserve publish additional details concerning the implementation of the Midsize Business Loan program pursuant to future regulations and guidance.
• Midsize Business Loans shall be treated as indebtedness for tax purposes. (Sec. 4003(h)).
• Additionally, subsequent guidance and regulations may include “class” waivers of specific restrictions on stock buybacks, dividends or executive compensation on a sector-wide or case-by-case basis, as contemplated by Section 4003(c)(3)(A)(iii) of Title IV.
• Note that Midsize Business Loans shall be treated as indebtedness for tax purposes. (Sec. 4003(h)).
• Midsize Business Loans are not permitted to be made to “covered entities”, which are defined as any entity in which 20% or more (by vote or value) of the equity of such entity is owned by the President, Vice President, head of an Executive department, or Member of Congress, or any spouse, children, son-in-law, or daughter-in-law of the foregoing (each, a “Covered Individual”). (Sec. 4019).

LENDER CONSIDERATIONS IN TITLE IV
• Although the forthcoming regulations may provide additional restrictions, Title IV of the Act only provides that the direct loans would be made by “banks and other lenders”.
• While the Treasury Secretary has broad discretion over the Midsize Business Loan Program, note that the applicable taxpayer protections and other requirements under section 13(3) of the Federal Reserve Act related to collateralization, taxpayer protection and borrower solvency still apply. (Sec. 4003(c)(3)(B)).
• Midsize Business Loans must be offered as part of a bilateral loan agreement and may not be issued as part of (i) a syndicated loan, (ii) a loan originated by a financial institution in the ordinary course of business, or (iii) a securities or capital markets transaction. (Sec. 4003(c)(3)(A)(i)(II)).

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