Summarizing the Mid-Size Business Loan Program

The CARES Act authorizes $500 billion in lending to medium and large businesses, including nonprofits. A significant amount is set-aside for the aviation and national security sectors, with $454 billion remaining for other businesses and nonprofits. Treasury and the Federal Reserve are working out how to utilize this new lending authority and we may see one or two specific programs targeting medium and large businesses and nonprofits.

The CARES Act provided great specificity for the creation of a Mid-Size Business Loan Program for businesses and nonprofits with 500 to 10,000 employees but also recognized that the Federal Reserve has its own authorities. Regulations from the Treasury Department are expected within 10 days after signing the bill into law. Arent Fox will continue to update, and expand on, this summary as more information becomes available.

Below is a summary of the provisions of the Mid-Size Business Loan Program. It, and any lending provisions for larger businesses, will be fleshed out in new regulations and guidance from Treasury and the Federal Reserve in the coming days.

Aggregate Funds Available

For medium and large businesses, including nonprofits, $454 billion available for loans and loan guarantees to, and other investments in, programs and facilities established by the Federal Reserve.

Direct Loan Availability

Federal Reserve programs and facilities that may be supported include direct loans to eligible businesses including nonprofit organizations

Eligibility Requirements

Organization: The recipient must be organized in the United States
Employee Location: The majority of the recipient’s employees must be located in the United States.
Size: The recipient must have between 500 and 10,000 employees.
Eligibility for Other Programs: The recipient must not have otherwise received adequate economic relief in the form of loans or loan guarantees provided under the Act. We expect that the definition of “adequate” and how it will be determined will be clarified in the regulations.
Bankruptcy: The recipient must not be a debtor in a bankruptcy proceeding.

Key Loan Terms

Interest Rate: Capped at 2% per annum.
Principal and Interest Payment Deferral: Both principal and interest will be deferred for at least six months.
Other Loan Terms Undefined: The legislation does not include any provisions relating to the term of the loans, amortization schedules, prepayment terms, or other key terms. We expect that many of these provisions will be clarified in the regulations and/or guidance from the Federal Reserve.

Use of Proceeds

Loan proceeds must be used to retain at least 90% of the recipient’s workforce, at full compensation and benefits until September 30, 2020.

Business Restrictions

Restoration of Workforce: The recipient must certify that it intends to restore at least 90% of its workforce (as of February 1, 2020), and to restore all compensation and benefits to its workers no later than four months after the end of the public health emergency, as determined by the Secretary of Health and Human Services.
No dividends or Equity Repurchases: The recipient must certify that it will not pay dividends with respect to its common stock or repurchase equity security of the recipient or any parent company that is listed on a national securities exchange while the loan is outstanding except to the extent contractually committed as of the date of enactment of the legislation.
No Outsourcing of Jobs: The recipient must certify that it will not outsource or offshore jobs for the term of the loan and for two years after completing repayment of the loan.
Union Contracts: The recipient must certify that it will not abrogate existing collective bargaining agreements for the term of the loan and for two years after completing repayment of the loan.
Union Neutrality: The recipient must certify that it will remain neutral in any union organizing effort for the term of the loan.

Executive Compensation Restrictions

Officers and employees that received total compensation more than $425,000 in 2019 are not eligible for increases in total compensation above the 2019 level until one year after the loan is repaid.

Until one year after the loan is repaid, officers and employees that received total compensation of more than $3,000,000 in 2019 are limited to a salary equal to (i) $3,000,000, plus (ii) 50% of the excess over $3,000,000.

No retirement or severance packages can exceed twice the maximum total compensation during 2019.

Total compensation includes salary, bonus, awards of stock and other financial benefits.