The Federal Reserve took additional actions on April 9 to provide up to $2.3 trillion in loans to support the US economy during the coronavirus (COVID-19) pandemic. This LawFlash covers the new and expanded programs, and provides comprehensive coverage of the Coronavirus Economic Stabilization Act.
The Federal Reserve will do the following:
- Purchase up to $600 billion in loans through the Main Street Lending Program. The US Department of the Treasury, using funding from the CARES Act, will provide $75 billion in equity to the facility. The Federal Reserve will solicit comments from the public on the Main Street Lending Program through April 16 and expects to begin funding in late April or early May.
- Bolster the Small Business Administration's (SBA’s) Paycheck Protection Program (PPP) by supplying liquidity to participating financial institutions. The PPP Liquidity Facility (PPPLF) will extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value.
- Expand the size and scope of the Primary and Secondary Market Corporate Credit Facilities (PMCCF and SMCCF) and the Term Asset-Backed Securities Loan Facility (TALF). These three programs will now support up to $850 billion in credit backed by $85 billion in credit protection from the Treasury.
- Establish a Municipal Liquidity Facility that will offer up to $500 billion in lending to US states and municipalities. The Treasury will provide $35 billion of credit protection to the Federal Reserve for this facility using funds appropriated by the CARES Act.
KEY PROGRAMS FOR BUSINESSES
Main Street Lending Program. The Treasury Department and the Federal Reserve announced this new lending program on April 9. The program offers term loans to US companies that either (1) employ 10,000 or fewer workers or (2) had $2.5 billion or less in annual revenue in 2019. To be eligible, a borrower must be “a business that is created or organized in the United States or under the laws of the United States with significant operations in and a majority of its employees based in the United States.”
Under the Main Street Lending Program, eligible lenders (i.e., US insured depository institutions, US bank holding companies, and US savings and loan holding companies) may originate new Main Street loans or use Main Street loans to increase the size of existing loans to eligible businesses. Borrowers that have taken advantage of the PPP may also borrow Main Street loans. Borrowers can only participate in one of the two Main Street Lending Program facilities described below:
- Main Street New Loan Facility. Minimum term loan size is $1 million, and the maximum is the lesser of (1) $25 million or (2) an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed four times the borrower’s 2019 earnings before interest, taxes, depreciation, and amortization (EBITDA). Loans are unsecured.
- Main Street Expanded Loan Facility. Minimum term loan size is $1 million, and the maximum is the least of (1) $150 million, (2) 30% of the borrower’s existing outstanding and committed but undrawn bank debt, or (3) an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed six times the borrower’s 2019 EBITDA. Loans may be secured.
Main Street Loan Terms.
- Four-year maturity
- Interest rates equal to the Secure Overnight Financing Rate (SOFR) plus 250-400 basis points
- Principal and interest payments deferred for one year; prepayment of loan permitted without penalty
Lender Required Attestations. In addition to certifications required by applicable statutes and regulations, the following attestations will be required of the Main Street lender:
- Proceeds of the Main Street loan will not be used to repay or refinance preexisting loans or lines of credit made by the Main Street lender to the borrower
- The lender will not cancel or reduce any existing lines of credit outstanding to the borrower
- No member of Congress, head of a US federal executive department, the US president or vice president, or family members of any of these individual has a controlling interest in the borrower
Borrower Required Attestations. In addition to certifications required by applicable statutes and regulations, the following attestations will be required of the borrower:
- The borrower requires financing due to exigent circumstances presented by COVID-19 and, using the proceeds of the loan, it will make reasonable efforts to maintain its payroll and retain its employees during the term of the loan.
- Borrower will not use the proceeds of the loan to repay other loan balances.
- It will not repay other debt of equal or lower priority, with the exception of mandatory principal payments, unless the Main Street loan has first been paid in full.
- It will not seek to cancel or reduce any of its outstanding lines of credit with the Main Street lender or any other lender.
- It meets the EBITDA leverage condition for the applicable facility under the Main Street Lending Program.
- It will follow compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs (described below) under Section 4003(c)(3)(A)(ii) of the CARES Act.
- No member of Congress, head of an executive department, the US president or vice president, or family member of any of these individuals has a controlling interest in the borrower.
Restrictions under Section 4003(c)(3)(A)(ii) of the CARES Act.
- Stock buybacks: Through the life of the loan, plus one year
- Dividends and capital distributions: Through the life of the loan, plus one year (the Treasury secretary may waive this limitation)
- Executive bonuses: Through the life of the loan, plus one year:
- Officers and employees who received more than $425,000 in total compensation in 2019 cannot receive more than their 2019 compensation and cannot receive severance pay of more than twice their 2019 compensation;
- officers and employees who received more than $3 million in total compensation in 2019 cannot receive, during any 12-consecutive-month period, more than $3 million plus 50% of their excess compensation over $3 million; and
- total compensation includes salary, bonuses, awards of stock, and other financial benefits
Fees. As part of the Main Street Lending Program, a Federal Reserve Bank will commit to lend to a single common special purpose vehicle (SPV) on a recourse basis. The SPV will purchase 95% participation in Main Street loans from Main Street lenders. Main Street lenders would retain 5% of each Main Street loan.
- Facility Fee: A lender under the Main Street New Loan Facility will pay a facility fee of 100 basis points of the principal amount of the loan participation purchased by the SPV (i.e., 95% of the principal amount of the loan). The lender may require the borrower to pay this fee.
- Loan Origination and Servicing: The borrower will pay the Main Street lender an origination fee of 100 basis points of the principal amount of the Main Street loan (or the upsized tranche of the loan, as applicable). The SPV will pay a Main Street lender 25 basis points of the principal amount of its participation in the Main Street loan per annum for loan servicing.
- Facility Termination. The SPV will purchase participation in eligible loans under the Main Street Lending Program until September 30, 2020.
Mid-Sized Business Lending Program. The Coronavirus Economic Stabilization Act (described in more detail below) authorizes the Federal Reserve to establish a Mid-sized Business Lending Program (in addition to the Main Street Lending Program) to offer loans, loan guarantees, or other investments provided by banks and other lenders (with an interest rate of less than 2% and no payments due in the first six months) to businesses with between 500 and 10,000 employees that need the loan to support ongoing operations, if the borrower makes a good-faith certification to the following:
- The borrower will use the funds to retain 90% of its workforce until September 30, 2020.
- The borrower intends to restore 90% of its payroll as of February 1, 2020 and all compensation and benefits for four months after the termination of the public health emergency.
- It is a business that is created or organized in the United States or under the laws of the United States with significant operations in and a majority of its employees based in the United States.
- It is not a debtor in a bankruptcy proceeding.
- It will not pay dividends to common stock or repurchase equity security for the term of the loan.
- It will not outsource or offshore jobs through the life of the loan plus two years.
- It will not abrogate existing collective bargaining agreements through the life of the loan plus two years.
- It will remain neutral in union organizing efforts for the term of the loan.
PAYCHECK PROTECTION PROGRAM LENDING FACILITY
Under the PPPLF, the Federal Reserve Banks will lend to eligible borrowers on a non-recourse basis, taking the SBA’s PPP loans as collateral. All depository institutions that originate PPP loans are eligible to borrow under the PPPLF. Eligible borrowers participate in the PPPLF through the Reserve Bank in whose district the eligible borrower is located.
- Maturity and Acceleration: The maturity date will equal the maturity date of the PPP loan pledged to secure the extension of credit. The maturity date of the PPPLF’s extension of credit will be accelerated if the underlying PPP loan goes into default and the eligible borrower sells the loan to the SBA to realize on the SBA guarantee. The maturity date of the PPPLF’s extension of credit also will be accelerated to the extent of any loan forgiveness reimbursement received by the eligible borrower from the SBA. A PPP loan will be assigned a risk weight of 0%.
- Interest Rate: Extensions of credit will be made at an interest rate of 35 basis points.
- Fees: None.
- Facility Termination: No new extensions of credit will be made after September 30, 2020, unless the program is extended.
PRIMARY MARKET CORPORATE CREDIT FACILITY
The PMCCF will serve as a funding backstop for corporate debt issued by eligible issuers. In combination with the SMCCF, the PMCCF will support up to $750 billion in credit. The PMCCF may purchase eligible corporate bonds as the sole investor in a bond issuance.
Eligible corporate bonds must be (1) issued by an eligible issuer and (2) have a maturity of four years or less at the time of bond purchase by the facility. The PMCCF may also purchase portions of syndicated loans or bonds of eligible issuers at issuance.
Eligible syndicated loans and bonds must be (1) issued by an eligible issuer and (2) have a maturity of four years or less at the time of purchase by the facility.
The PMCCF may purchase no more than 25% of any loan syndication or bond issuance. The maximum amount of instruments that the PMCCF and the SMCCF combined will purchase with respect to any eligible issuer is capped at 1.5% of the combined potential size of the PMCCF and the SMCCF. The PMCCF will cease purchasing eligible assets by September 30, 2020, unless the facility is extended.
To qualify as an eligible issuer, the issuer must satisfy the following conditions:
- The issuer is a business that is created or organized in the United States or under the laws of the United States with significant operations in and a majority of its employees based in the United States.
- It was rated at least BBB-/Baa3 as of March 22, 2020, by a major nationally recognized statistical rating organization (NRSRO). Issuers rated at least BBB-/Baa3 as of March 22 but subsequently downgraded must be rated at least BB-/Ba3 at the time the PMCCF makes a purchase.
- It is not an insured depository institution or depository institution holding company, as defined in the Dodd-Frank Act.
- It has not received specific support pursuant to the CARES Act or any subsequent federal legislation.
- No member of Congress, head of a US federal executive department, the US president or vice president, or family member of any of these individuals has a controlling interest in the issuer.
To qualify as an eligible seller, the seller must be organized under US law and have a majority of employees in the United States. The seller must also satisfy the conflicts-of-interest requirements under section 4019 of the CARES Act.
Pricing.
- Eligible corporate bonds: Pricing will be issuer-specific, informed by market conditions, plus a 100 basis point facility fee.
- Eligible syndicated loans and bonds: The PMCCF will receive the same pricing as other syndicate members, plus a 100 basis point facility fee on the PMCCF’s share of the syndication.
SECONDARY MARKET CORPORATE CREDIT FACILITY
Under the SMCCF, the Federal Reserve Bank of New York will lend, on a recourse basis, to an SPV that will purchase corporate debt issued by eligible issuers in the secondary market. In combination with the PMCCF, the SMCCF will support up to $750 billion in credit.
The SMCCF will purchase eligible individual corporate bonds as well as eligible corporate bond portfolios in the form of exchange-traded funds (ETFs). The SMCCF may purchase corporate bonds that (1) were issued by an eligible issuer, (2) have a remaining maturity of five years or less, and (3) were sold to the facility by an eligible seller.
The SMCCF may also purchase US-listed ETFs whose investment objective is to provide broad exposure to the market for US corporate bonds. The preponderance of ETF holdings will be of ETFs whose primary investment objective is exposure to US investment-grade corporate bonds, and the remainder will be in ETFs whose primary investment objective is exposure to US high-yield corporate bonds. The SMCCF will cease purchasing eligible assets by September 30, 2020, unless the facility is extended.
To qualify as an eligible issuer, the issuer must satisfy the following conditions:
- The issuer is a business that is created or organized in the United States or under the laws of the United States with significant operations in and a majority of its employees based in the United States.
- It was rated at least BBB-/Baa3 as of March 22, 2020, by a major NRSRO. An issuer rated at least BBB-/Baa3 as of March 22 but subsequently downgraded must be rated at least BB-/Ba3 as of the date on which the SMCCF makes a purchase.
- It is not an insured depository institution or depository institution holding company, as defined in the Dodd-Frank Act.
- It has not received specific support pursuant to the CARES Act or any subsequent federal legislation.
- No member of Congress, head of a US federal executive department, the US president or vice president, or family member of any of these individual has a controlling interest in the issuer.
Pricing. The SMCCF will purchase eligible corporate bonds at fair market value in the secondary market. The facility will avoid purchasing shares of eligible ETFs when they trade at prices that materially exceed the estimated net asset value of the underlying portfolio.
TERM ASSET-BACKED SECURITIES LOAN FACILITY
The TALF will serve as a funding backstop to facilitate the issuance of eligible asset-backed securities on or after March 23, 2020. Under the TALF, the Federal Reserve Bank of New York will lend to an SPV on a recourse basis. The TALF SPV will initially make up to $100 billion of loans available.
The loans will (1) have three-year terms, (2) be nonrecourse to the borrower, and (3) be fully secured by eligible asset-backed securities. Substitution of collateral during the term of the loan generally will not be allowed. Eligible borrowers and issuers of eligible collateral will be subject to the conflict of interest requirements of CARES Act section 4019.
Eligible Borrowers. All US companies that own eligible collateral and maintain an account relationship with a primary dealer are eligible to borrow under the TALF. A US company is defined as a business that is created or organized in the United States or under the laws of the United States with significant operations in and a majority of its employees based in the United States.
Eligible Collateral.
- Eligible collateral includes US dollar denominated cash asset-backed securities that have a credit rating in the highest long-term or, in the case of non-mortgage backed asset-backed securities, the highest short-term investment-grade rating category from at least two eligible NRSROs and do not have a credit rating below the highest investment-grade rating category from an eligible NRSRO.
- All or substantially all of the credit exposures underlying eligible asset-backed securities must have been originated by a US company, and the issuer of eligible collateral must be a US company.
- Eligible asset-backed securities must be issued on or after March 23, 2020. Commercial mortgage-backed securities issued on or after March 23, 2020, will not be eligible. The underlying credit exposures for commercial mortgage-backed securities must be to real property located in the United States or one of its territories.
- The underlying credit exposures must be one of the following:
- Auto loans and leases
- Student loans
- Credit card receivables (both consumer and corporate)
- Equipment loans and leases
- Floorplan loans
- Insurance premium finance loans
- Certain SBA-guaranteed small business loans
- Leveraged loans
- Commercial mortgages
Fees. The TALF SPV will assess an administrative fee equal to 10 basis points of the loan amount on the settlement date for collateral.
MUNICIPAL LIQUIDITY FACILITY
The Municipal Liquidity Facility will support lending to US states and the District of Columbia, US cities with a population exceeding one million residents, and US counties with a population exceeding two million residents. Under this program, a Federal Reserve Bank will lend to an SPV on a recourse basis.
The SPV will purchase eligible notes directly from eligible issuers at the time of issuance. The SPV will have the ability to purchase up to $500 billion of eligible notes. Notes purchased by the SPV are callable by the eligible issuer at any time at par.
Eligible Notes. Eligible notes are tax anticipation notes, tax and revenue anticipation notes, bond anticipation notes, and other similar short-term notes issued by eligible issuers that mature no more than two years from the date of issuance. Relevant legal opinions and disclosures will be required as determined by the Federal Reserve prior to purchase.
Eligible Issuer. An eligible issuer is a US state, city, or county (or an instrumentality that issues on behalf of the state, city, or county for the purpose of managing its cash flows). Only one issuer per state, city, or county is eligible.
Limit per State, City, and County. The SPV may purchase eligible notes issued by or on behalf of a state, city, or county in one or more issuances of up to an aggregate amount of 20% of the general revenue from its own sources and utility revenue of the applicable state, city, or county government for fiscal year 2017.
States may request that the SPV purchase eligible notes in excess of the applicable limit in order to assist political subdivisions and instrumentalities that are not eligible.
Origination Fee. Each eligible issuer must pay an origination fee equal to 10 basis points of the principal amount of the eligible issuer’s notes purchased by the SPV, and such fee may be paid from the proceeds of the issuance.
Eligible Use of Proceeds. An eligible issuer may use the proceeds of eligible notes purchased by the SPV to manage the cash flow impact of income tax deferrals, reductions of tax and other revenues, or increases in expenses related to or resulting from COVID-19, and requirements for the payment of principal and interest on obligations of the relevant state, city, or county.
An eligible issuer may use the proceeds of the notes purchased by the SPV to purchase similar notes issued by, or to assist, political subdivisions and instrumentalities of the relevant state, city, or county.
Termination Date. The SPV will cease purchasing eligible notes on September 30, 2020, unless the program is extended. A Federal Reserve Bank will continue to fund the SPV after such date until the SPV’s underlying assets mature or are sold.
THE CORONAVIRUS ECONOMIC STABILIZATION ACT
The Coronavirus Economic Stabilization Act, found in Title IV, Subtitle A of the CARES Act, authorizes the secretary of the Treasury to make loans, loan guarantees, and other investments of up to $500 billion to support certain eligible businesses, including US businesses that have not otherwise received adequate relief in the form of loan or loan guarantees under the CARES Act, air carriers, and businesses “critical to maintaining national security.”
The Coronavirus Economic Stabilization Act will provide immediate liquidity to the airline industry through a combination of direct loans and loan guarantees, as well as indirect loans and other investments to entities that finance airlines.
Key features of the act include the following:
- Up to $25 billion in loans and loan guarantees for passenger air carriers
- Up to $4 billion in loans and loan guarantees for cargo air carriers
- Up to $17 billion in loans and loan guarantees for “businesses critical to maintaining national security” (this category of business is not further defined in the act)
The bulk of the available assistance—up to $454 billion and any unused amounts in the previous categories—will be made available as loans or loan guarantees to eligible businesses.
Eligibility Criteria. To qualify for assistance under the Coronavirus Economic Stabilization Act, air carriers and defense businesses and loans/loan guarantees must meet the following conditions:
- Credit is not otherwise reasonably available.
- The new obligation is prudently incurred.
- If there is no security, the loan/loan guaranty must be at a rate that reflects the loan’s risk and is, to the extent practicable, not less than the rate for comparable obligations prior to the COVID-19 outbreak.
- There must be a five-year limitation on maturity.
- The business must maintain at least 90% of its existing employment levels as of March 24, 2020.
- The business must be a business that is created or organized in the United States or under the laws of the United States with significant operations in and a majority of its employees based in the United States.
- The continued operations of the business are jeopardized.
View the Treasury’s March 30 guidance on procedures and minimum requirements for loans under the act.
View the Treasury’s April 6 draft application for air carriers and certain eligible businesses.
Restrictions on Air Carriers, Defense Businesses, and Direct Loans. Air carriers, defense businesses, and businesses that borrow direct loans under the Coronavirus Economic Stabilization Act are prohibited per the restrictions outlined in “Restrictions under Section 4003(c)(3)(A)(ii) of the CARES Act” above.
CORONAVIRUS COVID-19 TASK FORCE
For our clients, we have formed a multidisciplinary Coronavirus COVID-19 Task Force to help guide you through the broad scope of legal issues brought on by this public health challenge. We also have launched a resource page to help keep you on top of developments as they unfold.
