The purpose of the CESA loan program is to provide certain targeted loans as well as liquidity that supports lending to businesses, states and municipalities.
Businesses have principally focused on relief available under the Paycheck Protection Program and Economic Injury Disaster Loan provisions of the CARES Act. To the extent businesses qualify, these programs provide the most immediate and beneficial relief available under the Act. Further, the federal government has initially paid the most attention to these programs and how to bring them quickly online. For businesses that do not qualify for these programs, alternative relief may be available under other provisions of the Act.
Coronavirus Economic Stabilization Act
The Coronavirus Economic Stabilization Act of 2020 (CESA), CARES Act, Title IV, Subtitle A, creates loan (and similar) programs in the aggregate amount of $500 billion that will be directed by the U.S. Treasury Department, and will also support loan programs or facilities administered by the Federal Reserve System. The purpose of the CESA loan program is to provide certain targeted loans as well as liquidity that supports lending to businesses (that have not otherwise received adequate relief in loans or loan guarantees under the CARES Act), states and municipalities.
Up to $46 billion of the CESA loan program is allocated to passenger airlines (and ancillary businesses), cargo air carriers and businesses critical to maintaining national security. These loans will be administered directly by the U.S. Treasury Department. The remaining $454 billion available under the program (plus any unused amounts of the allocated loans) will be available for loans to businesses, states and municipalities.
General Loan Restrictions
Direct loans to businesses are subject to various restrictions. Loan proceeds generally cannot be used for stock buybacks. Companies that receive loans must be U.S. entities with significant operations and a majority of their employees in the U.S. Companies receiving loans are prohibited from paying dividends on their common stock for 12 months following repayment of their loans, and executive compensation is limited to certain levels. In addition, these loans to businesses cannot be part of a syndicated loan, a loan originated by a financial institution in the ordinary course of business, or a securities or capital markets transaction.
Midsized Business Loan Program
Within the universe of loans to businesses under the CESA loan program, CESA asks the Treasury Department to implement a specific program providing liquidity to financial institutions that make direct loans to businesses (and nonprofits) with between 500 and 10,000 employees. The loans under this midsized business loan program would be at rates of no more than 2 percent per year, with no principal or interest due within at least the first six months of the loan’s inception. Eligible business borrowers would be required to certify that:
- Economic uncertainty makes the loan necessary to support ongoing operations;
- The borrower will retain at least 90 percent of its workforce (at full compensation and benefits) until September 30, 2020;
- The borrower intends to restore its workforce to 90 percent of its February 1, 2020, (before crisis) level within four months following the end of the state of emergency;
- The borrower is domiciled in the U.S. with significant operations and employees in the U.S. (certifying an earlier noted requirement under the CESA loan program);
- The borrower is not a debtor in bankruptcy;
- The borrower will not pay dividends on its common stock or repurchase any of its shares listed on a national securities exchange while the loan is outstanding (with certain exceptions) (certifying earlier noted requirements under the CESA loan program);
- The borrower will not outsource or offshore jobs though the term of the loan and for two years thereafter;
- The borrower will not abrogate existing collective bargaining agreements though the term of the loan and for two years thereafter; and
- The borrower will remain neutral in any union organizing effort for the term of the loan.
Loans under the CESA loan program are not subject to forgiveness. They are low interest, easily obtainable loans that are backstops for business operations when no other provisions of the CARES Act provide adequate relief. It is the catchall category under the immense package comprising the CARES Act. Besides the allocated loans to air carriers and businesses critical to maintaining national security that the Treasury Department is directed to provide guidance on no later than 10 days following enactment of the CARES Act, there is no set timeline within the CARES Act for the implementation of the CESA loan program. However, given the size of the program, comprising almost a quarter of the relief provided under the CARES Act, guidance regarding its implementation should be forthcoming very shortly. We will provide another Alert as soon as such implementation guidance is released.
About Duane Morris
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For Further Information
If you have any questions about this Alert, please contact Bruce H. Jurist, Sandra G. Stoneman, Nanette C. Heide, any member of the COVID-19 Strategy Team or the attorney in the firm with whom you are regularly in contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.