CARES Act: direct lending to SMEs briefing

Financing under the direct loan program for medium-sized businesses, subject to the following considerations:

1. Financing could be in the form of a loan or a guarantee of outstanding debt owed to third parties. The program is intended to be intermediated by banks and other lenders.
2. Secretary of Treasury Mnuchin said on Sunday, March 29 that the program would be up and running by Friday, April 3.
3. We don't yet know what mechanism will be used in order to allocate available credit (at least $454bn, plus leverage provided by the Federal Reserve and the banking system).
4. The US subsidiary must be an eligible borrower. Eligible borrowers are businesses with between 500 and 10,000 employees.
5. Eligible borrowers are businesses (including subsidiaries of foreign parents):
   • that are created or organized in the United States or under the laws of the United States; and
   • that have significant operations in and a majority of its employees based in the United States.
6. The borrower must make the following certifications:
   • the uncertainty of economic conditions as of the date of the application makes necessary the loan request to support the ongoing operations of the borrower (depending upon subsequent clarification, this could rule out borrowers with access to sufficient funds from private credit sources);
   • the funds it receives will be used to retain at least 90 percent of the borrower's workforce, at full compensation and benefits, until September 30, 2020 (date on which this is tested is unclear—is it a fixed date (see immediately below) or the date the loan is made or something else?);
   • the borrower intends to restore not less than 90 percent of the workforce of the borrower that existed as of February 1, 2020, and to restore all compensation and benefits to the workers of the borrower no later than four months after the termination date of the COVID-19 public health emergency;
   • the borrower is an entity or business that is domiciled in the United States with significant operations and employees located in the United States;
   • the borrower is not a debtor in a bankruptcy proceeding;
   • the borrower is created or organized in the United States or under the laws of the United States and has significant operations in and a majority of its employees based in the United States;
   • the borrower will comply with the equity distribution limitations described below;
   • the borrower will not outsource or offshore jobs for the term of the loan and two years after completing repayment of the loan;
   • the borrower will not abrogate existing collective bargaining agreements for the term of the loan and two years after completing repayment of the loan; and
   • that the borrower will remain neutral in any union organizing effort for the term of the loan.
7. Financing can take the form of bonds or loans.
8. Program is authorized to provide liquidity in both the primary issuance and secondary markets.
9. Interest rate determined based on the risk plus the current average yield on Treasuries of comparable maturity. Interest rate capped at 2 percent.
10. Loan likely to be secured (terms unclear at this point). Query how additional secured loans may be incurred if that would result in violation of a debt or lien covenant in an existing credit document.
11. Loans not eligible for forgiveness of principal.
12. Equity distribution limitations: Borrower cannot:
    • until the date 12 months after the date on which the direct loan is no longer outstanding, repurchase an equity security that is listed on a national securities exchange of the borrower or any parent company of the borrower while the direct loan is outstanding (read literally, the parent company can effect a repurchase, but the borrower cannot be the source of funding—Treasury will presumably clarify), except to the extent required under a contractual obligation that is in effect as of the date of enactment of the CARES Act; and
    • until the date 12 months after the date on which the direct loan is no longer outstanding, pay dividends or make other capital distributions with respect to the common stock of the borrower.
13. Compensation limitations: During the period beginning on the date on which the agreement is executed and ending on the date that is one year after the date on which the loan or loan guarantee is no longer outstanding:
    • no officer or employee of the borrower whose total compensation exceeded $425,000 in calendar year 2019 (other than an employee whose compensation is determined through an existing collective bargaining agreement entered into prior to March 1, 2020):
      • will receive from the borrower total compensation which exceeds, during any 12 consecutive months of such period, the total compensation received by the officer or employee from the borrower in calendar year 2019; or
      • will receive from the borrower severance pay or other benefits upon termination of employment with the borrower which exceeds twice the maximum total compensation received by the officer or employee from the borrower in calendar year 2019; and
    • no officer or employee of the borrower whose total compensation exceeded $3m in calendar year 2019 may receive during any 12 consecutive months of such period total compensation in excess of the sum of— (A) $3m; and (B) 50 percent of the excess over $3m of the total compensation received by the officer or employee from the borrower in calendar year 2019.

"Total compensation" includes salary, bonuses, awards of stock, and other financial benefits provided by a borrower to an officer or employee of the borrower.