The Coronavirus Aid, Relief, and Economic Security Act of 2020 (the CARES Act) offers a range of loans, loan guarantees and other financial assistance to US businesses under a number of programs with different eligibility criteria and conditions. The size of the business, the sector in which the business operates, and other factors all play a role in differentiating the various types of funding.

This brief overview offers a road map for businesses to utilize in navigating their way through these different programs and making initial judgments as to which offer the best avenue for providing liquidity in challenging times.

In general, Title I of the CARES Act establishes a financial assistance program to help small businesses alleviate certain operational expenses and Title IV establishes a $500 billion financial assistance package for businesses, States and municipalities that will be structured into a range of different programs.

In the near term, the Treasury, possibly the Small Business Administration (SBA) and the Federal Reserve, will issue additional guidance that fleshes out the details of these programs and indicates how eligible parties can access this emergency funding. We will monitor these developments and provide ongoing advice as specific information on financial assistance programs becomes available.

Overall, the various CARES Act programs are potentially valuable options for companies experiencing distress due to the coronavirus crisis. At the same time, however, firms will have to consider whether they are willing to agree to the robust conditions needed to access this credit – a number of which emerged from the experience with the Troubled Asset Relief Program (TARP) program during the financial crisis. The judgments companies make will depend in part on if other commercial sources of funding, whether through public financing, private bank financing, or otherwise, exist without such conditionality.

1. The $500 Billion Title IV Program

Title IV of the CARES Act permits the Secretary of the Treasury to make loans, loan guarantees and other investments in businesses, States and municipalities that do not exceed $500 billion in the aggregate.

Generally, loans under the program will be made at interest rates determined by the Secretary of the Treasury based on the risk and the current average yield on obligations of the US of comparable maturity (except that, as discussed below, medium-size businesses may be eligible for loans with an interest rate not higher than 2%).

Overall, Title IV is a substantial financial assistance program – similar to the TARP program instituted during the 2008 financial crisis – established to provide eligible companies with badly need liquidity. But not every company qualifies, and those that do qualify should give careful consideration to the restrictions that apply to receipt of these funds.

While some consider this program a “bailout,” the reality is that it does not provide grants, but only funds in the form of debt or equity where the US government stands to get a return in one form or another. The CARES Act is clear that the principal amount of any obligation issued under Title IV “shall not be reduced through loan forgiveness.”

1. Large Scale Assistance for Targeted Sectors: Airlines, Repair and Related Services, Cargo Air Carriers, and Businesses Critical to National Security

Select sectors for targeted assistance. Under the Title IV program, Congress established funding up to a maximum level for loans and loan guarantees for select categories of businesses adversely affected by the Coronavirus crisis:

1. Passenger airlines, eligible businesses certified as repair stations under Federal Aviation Administration rules and approved to perform inspection, repair, replace or overhaul services, and ticket agents – up to $25 billion. To benefit from the program, airlines and associated eligible businesses are required to commit to provide scheduled air transportation until March 1, 2022 (with both Transportation and Treasury to consider needs of remote communities in the administration of aid under the CARES Act).
2. Cargo air carriers – up to $4 billion. Cargo air carriers who avail themselves of CARES Act support are also required to commit to continue operations to the extent practicable until March 1, 2022.
3. Businesses “critical to national security” – up to $17 billion. This category, added late in the deliberations and not further defined in the CARES Act, apparently is designed to include companies like Boeing and its supply chain, that provide both commercial aircraft to beleaguered airlines (who in turn are critical to national security through programs like the Civil Reserve Air Fleet) and also are leading suppliers of national security solutions to the Department of Defense.

Leveraging of assistance. In light of the limited nature of the available Title IV funding generally (and the targeted sector funding in particular), it is expected that Treasury will see ways to use leverage to multiply the effect of the funding. For example, this could be achieved through using loan guarantees to backstop private sector commercial lending or some type of targeted debt or equity funds. While it remains to be seen what structures will be used to multiply the effect of the overall funding, the US government does have experience using loan guarantees in a range of areas to this effect.

Requirements for targeted sectoral assistance. Consistent with the congressional intent that the funding be provided to companies facing distress due to the coronavirus crisis, the CARES Act has set forth specific criteria that Treasury must determine are met to provide loans or loan guarantees to businesses in the three business sectors noted above. Specifically:

Conditions of targeted sectoral assistance. For assistance to these distressed sectors, the loan or loan guarantee agreement must include the following conditions – which Treasury does not appear to have authority to waive (a contentious point in congressional negotiations):

Financial protection for US Government on sectoral loans. Finally, for loans and guarantees in these distressed sectors, the CARES Act also requires that:

• Treasury must receive a warrant or equity interest in an eligible business that has securities traded on a national securities exchange; and
• For other businesses not traded on national exchanges, Treasury, in its discretion, must receive either a warrant or equity interest in the eligible business or a senior debt instrument issued by that business.

2. Financial Assistance for Other Businesses Outside of the Targeted Sectors

Under the CARES Act, $454 billion of the Title IV Program (as well as any funding earmarked for the distressed sectors that are not used) can also be used for providing financial assistance more broadly to other firms that are eligible businesses outside the distressed sectors as well as states and municipalities – whether through direct programs Treasury establishes, or programs or facilities established by the Federal Reserve System for the purpose of providing liquidity to the financial system that supports lending to such eligible businesses, states or municipalities, or otherwise. Subject to certain limitations, Treasury has broad authority to shape such programs.

More limited and mostly waivable requirements for other Title IV loans. Under any other Title IV loan or loan guarantee programs (i.e., other than the loans and loan guarantees for distressed sectors discussed above), there are several requirements and conditions that mirror those of the sectoral loans, which are repeated below for convenience.

*Requirements can be waived by Treasury.

Two important aspects of these loans, loan guarantees and investments in businesses outside the distressed sectors are as follows:*Requirements can be waived by Treasury.

• This set of requirements and conditions currently is more limited in nature, although additional requirements are possible. The requirements currently do not include any condition related to prudential considerations (ability to pay back), collateral, employment levels or incurrence of COVID-19 related losses, nor any requirement that the US government would take an equity or senior debt position. Nevertheless, it is entirely possible that other conditions will be added as Treasury and the Federal Reserve Bank flesh out the programs. For example, it would be consistent with past practice and not at all surprising if some or all of this program ultimately requires collateral, prudential analysis and that the loan is used for COVID-10 related losses. Conditions on employment levels are less likely (as Treasury will likely take the view that the congressional failure to add them here gave it flexibility not to include them). Finally, while guidelines may be issued, some of these conditions may be negotiated on a case by case, industry-specific basis.
• Waiver authority. Congress afforded Treasury the right to waive the restrictions on stock buybacks, dividends and executive compensation for this class of assistance – potentially affording more flexibility to eligible companies as well. Whether Treasury will issue “class” waivers on a sector or some other basis, or case-by-case individual waivers, remains to be seen.

3. Assistance to Mid-Sized Businesses Through Banks and Lending Institutions

The CARES Act requires that Treasury “endeavor” to create a program or facility that provides financing to banks and other lenders that make direct loans to eligible businesses including, to the extent practicable, mid-sized businesses (between 500-10,000 employees) and nonprofit organizations.

In short, the concept is that Treasury, would provide funding to banks and other financial institutions which in turn would provide direct loans to mid-sized firms. While there is nothing to stop Treasury from itself writing such loans to mid-sized businesses, the inherent limits on its bandwidth for such direct lending probably make this unlikely. Simply put, Treasury is not set up to be a large-scale lender.

Attractive interest rates; deferrals. The attractive feature of the direct loan program, if established, is that the annualized interest rate shall be no higher than 2% per annum. Treasury also has the discretion to defer payments of principal or interest for six months or longer.

Requirements for mid-sized direct loans. Like the sector loans, however, these direct loans also are subject to robust, but somewhat different requirements (as well as the buyback, dividend, executive compensation and US-connection requirements noted above for other Title IV loans). These requirements primarily reflect multiple goals including ensuring that the borrowers truly need the funds due to the COVID-19 crisis, and funds are applied to the protection of workers employed by borrowers. Specifically, under such direct loan programs for mid-sized businesses, the borrower must certify in good faith to the following:

No waiver authority. Notably, Congress has not afforded Treasury or the Federal Reserve the authority to waive any of the direct loan requirements and conditions noted above. Hence, these appear to be inflexible conditions that must be met, but in exchange for a preferred interest rate.

One question that has arisen is whether Treasury and the Federal Reserve could consider financial assistance to mid-size companies under separate authority (i.e., not as direct loans) that could avoid these requirements and conditions. While theoretically possible, it remains to be seen if the US government would be willing to adopt such an approach. Moreover, the limited bandwidth of Treasury and/or the Federal Reserve to directly make loans to a sizable number of mid-size firms probably limits the prospect of such a program.

2. Small Business Loan Programs and Special Access for Certain Hospitality Firms

Title I of The CARES Act amends Section 7(a) of the Small Business Act (the SBA) to create a $349 billion financial assistance program for small businesses – the “Paycheck Protection Program” – with the aim of ensuring their survival, minimizing any potential layoffs, and maintaining cash flows in connection with the COVID-19 crisis.

Eligible businesses. Companies eligible for assistance under the program include small business concerns as defined in the SBA, and any other business concern, nonprofit organization, veterans organization or tribal business concern that employs not more than the greater of (x) 500 employees or (y) if applicable, the size standard in number of employees established by the SBA for the industry in which the business operates. Generally, the SBA’s rules for determining whether concerns or entities are affiliated with each other will apply in determining whether a business is eligible for assistance under the program. As a result, companies with a common owner, including subsidiaries of larger firms, and portfolio companies of private equity firms might not qualify, even if they individually have 500 or fewer employees.

Broadened access to SBA loans for certain businesses. Under the CARES Act, however, special rules apply in determining the eligibility of certain small businesses.

Sole proprietors and similar entities covered. Sole proprietors, independent contractors, franchisors, franchises and self-employed individuals are eligible for loans under the program.

Certain hospitality businesses covered. Of most note, businesses in the “accommodation and food services sector” (covered by a North American Industry Classification System code beginning in 72) (hospitality businesses), which has been hard hit by the COVID-19 crisis, are singled out for special treatment. Such covered hospitality businesses includes hotels, restaurants, bars, campgrounds, casinos, and caterers.

Specifically, in contrast to the normal SBA rules, any covered hospitality businesses with more than a single physical location that employees not more than 500 employees per physical location are covered. Moreover, in an unusual decision for exigent times, the SBA’s affiliation rules are waived for these businesses (i.e., meaning that they are not removed from eligibility due to their affiliation with other larger businesses, private equity firms or the like). The affiliation rules are also waived for business concerns operating as a franchise that is assigned a franchise identifier code by the SBA.

Thus, as a practical matter, this potentially makes many restaurant, fast food and other food service chains eligible for relief notwithstanding that their overall size is above the typical SBA standards.

Requirements for program loans. Eligible businesses are subject to fewer requirements to obtain financial assistance under this program than recipients under the $500 billion Title IV program. The borrower must certify in good faith to the following:

Loan size, interest and other terms and conditions. The CARES Act specifies a number of terms and conditions for SBA loans authorized thereunder.

Loan forgiveness. Notably, loans made under the program may be partially- or fully-forgiven although in no event may the amount of the loan forgiveness exceed the principal amount of the loan.

Specifically, the forgiveness amount is determined first by adding the following costs incurred and paid by the loan recipient during the 8-week period following origination of the loan including payroll costs, interest on a covered mortgage, payments on a covered rent obligation and covered utility payments. This amount is then subject to reduction to the extent there are reductions in the number of full-time employees and/or reductions in salary and wages by the loan recipient during the 8-week period following origination of the loan as follows:

The Act also creates incentives for businesses to rehire workers who were laid off or to increase the salaries of workers who experienced a pay reduction. Specifically, the loan forgiveness amount will not be reduced in accordance with the above formula to the extent that a reduction in employees or in salary or wages occurred between February 15, 2020 and April 26, 2020, but the recipient eliminated the reduction (i.e., hired back employees or increased salaries or wages) by June 30, 2020.

A loan recipient seeking forgiveness must produce documents to permit determination of the forgiveness amount, including: (1) documentation verifying the number of full-time equivalent employees on payroll and pay rates for such employees; (2) documentation verifying payments on mortgage, lease, or utility payments; (3) a certification that the amount of the loan for which forgiveness is requested was used for proper purposes; and (4) any other documentation the Small Business Administration determines is necessary.

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