Federal non-SBA Loans and Loan Guarantees under the CARES Act

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March 26, 2020
Larry Tomlin
SmithAmundsen Financial Services Alert

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Title IV or the CARES Act authorizes the Secretary of the Treasury (the “Secretary”) to provide up to an aggregate of $500 billion of liquidity to eligible businesses, states, and municipalities related to losses incurred as a result of coronavirus in the form of loans, loan guarantees and other investments. 

Allocation of Funds

The $500 billion authorized under the Act will be allocated among different program recipients as follows: (i) up to $25 billion may be used to make loans and loan guarantees for passenger air carriers, eligible businesses that are certified under 15 CFR Part 145 and approved to perform inspection, repair, replace, or overhaul services, and ticket agents; (ii) up to $4 billion may be used to make loans and loan guarantees for cargo air carriers; (iii) up to $17 billion may be used to make loans and loan guarantees for businesses critical to maintaining national security; and (iv) up to the sum of $454 billion and any amounts not used as described above may be used to make loans, loan guarantees and other investments in programs and facilities established by the Board of Governors of the Federal Reserve System (the “Board”) for the purpose of providing liquidity to the financial system that supports lending to eligible businesses, states and municipalities.  Within 10 days after enactment of the CARES Act, the Secretary must publish procedures for application and minimum requirements.

Conditions for Loans to Passenger Air Carriers and Related Businesses, Cargo Air Carriers, and Businesses Critical to Maintaining National Security

To be eligible for a loan or guarantee under this provision, the borrower must show: 

In order to receive such a loan or a loan guarantee, the borrower must agree that, until one year after the loan or loan guarantee is no longer outstanding, officers and employees whose total compensation exceed the threshold amounts of $425,000 and $3,000,000 will be subject to limits with respect to the compensation and severance that they may receive from the borrower. 

To ensure that the federal government is compensated for the risk which it incurs as a result of making and guaranteeing loans, the Secretary is not authorized to make a loan or guarantee a loan to an eligible business unless the eligible business (i) grants the Secretary a warrant or another equity interest in the business in the case of eligible businesses with securities listed on a national securities exchange, or (ii) grants the Secretary a warrant or another equity interest in the business, or a senior debt instrument issued by the business in the case of eligible businesses whose securities are not listed on a national securities exchange.

Federal Reserve Programs or Facilities

Under the authority granted to it, the Board may establish an assistance program for mid-sized businesses and a Main Street Lending Program. The assistance program for mid-sized businesses will provide financing to banks and other lenders that loan money to eligible businesses with between 500-10,000 employees.  The loans will be at a rate of interest no greater than 2 percent per annum and no principal or interest shall be due for, at a minimum, the first 6 months after the loan is made.  The Main Street Lending Program will support lending to small to mid-sized businesses on such terms and conditions as the Board may determine. 

A borrower under the assistance program for mid-sized businesses must make a good faith certification that: 

 Prohibition on Loan Forgiveness

The principal amount of any obligation issued by an eligible business under any of the programs described above may not be reduced through loan forgiveness.