Title IV of the CARES Act (“Act”) authorized the Secretary of the Treasury (“Secretary”) to make up to $500 billion in loans, loan guarantees and other investments (“loans”) to support eligible businesses, states, and municipalities. Approximately $46 billion is to be allocated for the airline industry and businesses critical to maintaining national security. The remaining $454 billion is set aside for programs and facilities established by the Federal Reserve Board to support lending to eligible businesses, states, or municipalities.
Generally, the Secretary has the discretion to determine the appropriate loan terms, conditions, representations, warranties, and requirements for any loans made under Title IV. However, loan forgiveness is prohibited, and the rate set by the Secretary must be “based on the risk and the current average yield on outstanding marketable obligations of the United States of comparable maturity.”
Eligible businesses include those in the airline industry and businesses that have not received adequate economic relief from alternative programs provided in the Act, such as the relief provided to small businesses through the Paycheck Protection Program.
Title IV instructs the Secretary to implement programs that finance banks and other lenders to make loans to businesses, including nonprofit organizations, with 500 to 10,000 employees. These loans should cap annual interest rates at 2% with at least six months of deferred principal and interest payments.
When applying for one of these loans, an eligible business must certify, in good faith, all the following:
- Due to current economic uncertainty, the loan request is necessary to support the recipient’s ongoing business operations
- Funds received will be used to retain at least 90% of the recipient’s workforce, with full compensation and benefits, until at least September 30, 2020
- Within four months following the termination of the public health emergency declared by the Secretary of Health and Human Services, the recipient will work to restore at least 90% of its workforce, with full compensation and benefits, that was in place as of February 1, 2020
- The recipient’s business was created and organized, has significant operations, and bases a majority of its employees in the U.S.
- The recipient will not pay dividends or buy back stock of the eligible business or any parent company during the term of the loan
- The recipient will not outsource jobs during the term of the loan or for two years following repayment
- The recipient will continue to comply with existing collective bargaining agreements for the term of the loan and for two years following repayment
- The recipient will remain neutral as it relates to union organization for the term of the loan
Eligible Business Restrictions for Direct Loans
In addition to the mid-sized business loan program, Title IV authorized the Secretary to establish programs and facilities that make direct loans to eligible businesses. An eligible business seeking a direct loan will be required to enter into a loan agreement that prohibits the eligible business from engaging in the following activities:
- buying back stock of the eligible business or any parent company during the term of the loan and the following 12 months (this restriction also applies to affiliates of the eligible business)
- paying dividends or making capital distributions for the term of the loan and the following 12 months
- investing in or loaning money to any business that is not a U.S. business with significant operations and a majority of employees based in the U.S.
The following compensation restrictions will also apply from the date of execution of the loan agreement until one year following the term of the loan.
- Officers and employees whose total compensation (including salary, bonuses, stock awards and other financial benefits) exceeded $425,000 in the 2019 calendar year cannot receive a raise in compensation during any consecutive 12 month period and can only receive severance pay in an amount equal to or less than twice their total compensation in the 2019 calendar year.
- Officers and employees whose total compensation (including salary, bonuses, stock awards and other financial benefits) exceeded $3 million in the 2019 calendar year cannot receive compensation during any 12-month period that exceeds $3 million plus 50% of their excess over $3 million in 2019.
States and Municipalities
States and municipalities are included in the act, but there are no clear requirements for state and municipality lending. Rather it instructs the Secretary to work to implement programs that will provide funds for state and municipal lending. Governments looking for assistance as they see significant budget shortfalls must await further policy guidance.
Title IV provides alternative relief options for businesses impacted by COVID-19, with a focus on relief for mid-sized businesses that have 500 to 10,000 employees. However, these loans come with specific eligibility requirement and restrictions that can impact the way the company does business for up to two years following loan repayment.
Businesses with 500 or fewer employees, should consider alternative relief options under the Paycheck Protection Program.
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