The heart of the Stimulus bill’s assistance to larger companies -- defined as those that have upwards of 500 employees -- is contained in Title IV, Economic Stabilization and Assistance to Severely Distressed Sectors of the United States Economy. It is comprised of two parts, one of up to $46 billion that is targeted to “distressed” companies in particular targeted industries: up to $25 billion for passenger air carriers; up to $4 billion for cargo air carriers; and up to $17 billion for “business critical to maintaining national security.” This portion of the program consists of loans, loan guarantees and “other investments”, such as warrants or other equity securities. It is entirely administered by the Treasury Secretary, under rules for applications that Treasury will issue within a short time. Since both direct loans and guarantees are anticipated, it is possible that many, if not most of the support given under the targeted “distressed” companies program will be bank and other lender loans guaranteed by the Department of the Treasury (DOT). Partial guarantees -- such as for 10% or 12% of the loan -- could permit “leveraging” of the program by originating 8 or 10 times the volume of authorized loans. This leveraging is anticipated to be more important, however, in the context of the $450 billion Federal Reserve program described below, since many of the businesses in the targeted “distressed” program may require direct support from Treasury.
The second, larger portion of the $500 billion program for larger employers is the fund administered by the Federal Reserve, which amounts to $454 billion plus whatever amounts remain unused from the Treasury’s program. Although direct loans and guaranties are both authorized under the program, it is anticipated that leveraging of the fund by the Federal Reserve will push it to perhaps guarantee just a portion of most loans, thereby allowing it to have a much greater impact than by directly injecting $450 billion in loans to companies. In general, both programs, although the Federal Reserve’s in particular, have the goal of providing liquidity for the nation’s financial system that supports lending by:
- Purchasing obligations (bonds or notes typically) issued by companies
- Purchasing obligations in secondary (mainly public) markets
- Making secured and unsecured loans
Perhaps the best way for interested businesses to gain financing under either program, particularly the larger Fed program, is to work through the company’s regular financing sources, generally its commercial bank and other lenders, as well as any investment bankers who facilitate capital markets access. All of these financial institutions are familiar with working with the Federal Reserve and on some occasions, Treasury. Along with experienced legal counsel, these sources provide the standard entry into the Federal Reserve programs. The Treasury’s distressed industries program will also likely require direct approach to the Treasury through legal counsel.
For the Treasury’s $46 billion targeted industries program, the terms of the program’s loans are very much not as favorable as in the under 500 employee Paycheck Protection program separately funded by the bill, where the recipient’s basic compliance with terms, particularly with respect to maintaining pre-pandemic employment, means complete loan forgiveness, turning those loans essentially into grants. All of the loans in the “over 500 employee” programs (both Treasury and Federal Reserve) are indeed loans, or loan guaranties and are not ever forgiven. The loans in the Treasury program must be:
- For no longer than 5 years;
- At market rates, as determined by the government;
- Recipient cannot buy back stock for 12 months after the loan is no longer outstanding;
- Recipient cannot pay dividends or other capital distributions to stockholders for 12 months after loan is no longer outstanding;
- Until September 30, 2020, recipient must maintain employment as of March 24, 2020, “to the extent practicable”, and in any case, no more than 10% below March 24, 2020 levels; and
- Recipient must be organized as a company under U.S. law and majority of employees must be in U.S. (separately organized U.S. subsidiaries thus appear to qualify). So having a foreign parent company appears not to disqualify a U.S. domestic subsidiary. But Treasury and/or the Federal Reserve will need to clarify this point.
The Federal Reserve’s larger program has similar restrictions, including those regarding stock buybacks and dividends, and its undertaking regarding continuing employment may be even stricter. Waivers of the above are available from the Treasury Secretary if required but are highly unlikely: they are obtainable if necessary “to protect the interests of the Federal government” and then only if the Secretary publicly testifies to House and Senate about it. The requirements concerning links to U.S. business and U.S. employees are similar to the targeted industry program.
A sub-provision of the Fed program governs so-called “middle market” businesses, those between 500 and 10,000 employees. The Federal Reserve will specifically set up a funding program to banks and other lenders who will then make direct loans to such mid-market companies. These loans will carry preferential rates, no more than 2% per annum on the direct loan, with no principal or interest payable for 6 months. As with the other programs in the bill, a condition of participating in the middle market program is to retain 90% of recipient’s pre-pandemic workforce until at least September 30, 2020.
The standard other restrictions on recipients with respect to the Treasury program described above also apply to the Federal Reserve middle-market program with respect to U.S. touchstones on companies and employees; a commitment to not offshore or outsource jobs for 2 years after loan repayment; a commitment to not abrogate any collective bargaining agreements already in place for 2 years after repayment of the loan; and a commitment to remain neutral in labor organizing efforts. There is a separate provision that nothing in the bill prevents the Federal Reserve from undertaking its own Main Street Lending Program for small to mid-size businesses, including allowing participation by companies that also participate in the Federal Reserve lending program that is part of the stimulus bill. The Federal Reserve also has an additional program announced on March 23, 2020, that purchases investment-grade corporate debt in the secondary market that may also be of use to recipients of loans under the stimulus bill Federal Reserve program.
Certain additional terms apply to the Treasury’s “distressed” industry program, mainly to account for the increased risk to the Treasury from those loans: Treasury has a right to receive a common stock warrant or other equity security as part of the financing, and the recipient must accordingly be publicly traded. In other cases, Treasury may, at its option, receive a senior debt instrument in the company in lieu of equity. In either case, the Treasury may sell it on the market at any time. While it holds equity, the Treasury may not vote its shares.
For both the Treasury and Federal Reserve programs, there is as noted above no loan forgiveness, in contrast to the SBA under 500 employee program under the bill. For both the Treasury and the Federal Reserve programs, there are strict executive compensation limits: for employees who received more than $425,000 in total compensation in 2019, they may receive no more than that in 2020. Those who received more than $3 million in compensation have an additional restriction, mainly applicable to public company CEO’s: they may only receive compensation for 2020 equal to the sum of $3 million plus 50% of the excess over $3 million that they received in 2019.
The bill also provides certain long-sought regulatory relief for community banks (generally, those with under $10 billion in banking assets). The bill reduces their required capital leverage ratio of capital to assets from 9% to 8%; gives them relief from classification of so-called “Troubled Debt Restructuring” loans to customers that occurs because of the pandemic; and relief from the long-scheduled new loan accounting rules on Current Expected Credit Loss (it is deferred). The Treasury’s program (not the Federal Reserve’s), in order to prevent favoritism toward any person or company, is overseen by a special Inspector General and is overseen ultimately by a 5-person Board appointed exclusively by Congress. There is language in the bill that bans President Trump and his family members from participating in the program.
This is a fluid and rapidly changing situation and these resources are current only as of the date of publication. We recommend that you contact your local Quarles & Brady attorney regarding the most up-to-date information or with any other questions regarding this subject matter, or contact
 For technical reasons, the program is under DOT authority, but run by the Federal Reserve, which lacks direct statutory lending authority for such a large fund.