Much of the focus of the media coverage on the recently passed CARES Act concerns the loan provisions for small businesses through the Paycheck Protection Program. However, there are some benefits in the Act for mid-sized businesses (500 to 10,000 employees) outlined in Section 4003(c)(3)(D).
The law provides $454 billion in funding to banks and other lenders to make direct loans to mid-size businesses. These direct loans are subject to an annualized interest rate that is capped at 2%. See 4003(c)(3)(D)(i). For the first 6 months after the direct loan was made, no principal or interest is due. Id. However, there are a number of strings attached to these loans that are important to review. In order to receive a direct loan, the company must certify the following:
- The uncertainty of economic conditions as of the date of the application makes necessary the loan request to support the ongoing operations of the recipient;
- The funds it receives will be used to retain at least 90 percent of the recipient’s workforce, at full compensation and benefits, until September 30, 2020;
- The recipient intends to restore not less than 90 percent of the workforce of the recipient that existed as of February 1, 2020, and to restore all compensation and benefits to the workers of the recipient no later than 4 months after the termination date of the public health emergency;
- The recipient is an entity or business that is domiciled in the United States with significant operations and employees located in the United States;
- The recipient is not a debtor in a bankruptcy proceeding;
- The recipient 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 recipient will not pay dividends with respect to the common stock of the eligible business, or repurchase an equity security that is listed on a national securities exchange of the recipient or any parent company of the recipient while the direct loan is outstanding, except to the extent required under a contractual obligation that is in effect as of the date of enactment of this Act;
- The recipient will not outsource or offshore jobs for the term of the loan and 2 years after completing repayment of the loan;
- The recipient will not abrogate existing collective bargaining agreements for the term of the loan and 2 years after completing repayment of the loan; and
- That the recipient will remain neutral in any union organizing effort for the term of the loan.
See 4003(c)(3)(D)(i)(I)-(X).
There are also restrictions on high-earning employee and executive compensation to which the employers must agree. See Section 4004(a). For any officer or employee of the company whose total compensation exceeded $425,000, during the term of the loan and for one year after, the officer or employee may not have an increase in compensation. See Section 4004(a)(1). These same employees may not receive severance pay (or other termination benefits) that exceeds twice the maximum total compensation received by the officer or employee from the eligible business in calendar year 2019. Id.
Moreover, employees or officers receiving more than $3 million in compensation cannot receive total compensation more than $3 million and 50% of the excess of total compensation made over $3 million. See Section 4004(2). These restrictions may be waived by the U.S. Treasury. While it appears as though the employment compensation restrictions apply to mid-size businesses, there are ambiguities present in the law that makes this less than clear.
The law does not state when the loan program for mid-sized businesses will be rolled out. However, the Department of Treasury has already released guidance titled Procedures and Minimum Requirements for Loans to Air Carriers and Eligible Businesses and National Security Businesses under Division A, Title IV, Subtitle A of the [CARES Act], which provides preliminary procedures and requirements that “allow potential borrowers to begin preparing to submit an application.” The industries covered by this guidance also fall under Section 4003 of the CARES Act, so it is likely that this guidance will have some overlap with any forthcoming guidance for mid-sized business loans. This guidance includes a list of information that will be required for a loan application, including the following:
- Debt. A description of the borrower’s existing secured and unsecured debt, bank and other credit lines with outstanding and maximum balances, and major classes of existing security holders and creditors.
- Debt Service. A description of the borrower’s scheduled debt service for the next three years.
- Employment Levels. The borrower’s employment levels, by head count and total compensation amount, as of March 24, 2020, and any proposed changes to the borrower’s employment levels, relative to March 24, 2020, during 2020.
- Financial Statements. The consolidated financial statements of the borrower and any corporate parents for the previous three years, including, if available, financial statements that have been audited by an independent certified public accountant, including any associated notes, and any interim financial statements and associated notes for the current fiscal year.
- Covered Losses. A description of the covered losses that the borrower has incurred or will incur as a result of coronavirus, by line items detailing the cause of the loss, such as reduced demand, unavailability of credit, unbudgeted medical expenses, or other causes.
- Lack of Credit Elsewhere. Evidence based on factors such as market conditions, the borrower’s circumstances, or relationships with existing and potential creditors that the borrower cannot reasonably obtain credit elsewhere.
- Security. A description of the type and general value of all security, including but not limited to assets, property, and revenue streams, available to be pledged by the borrower and its subsidiaries to secure the loan, on both a senior and a subordinated basis.
- Use of Proceeds. The purposes for which the borrower will use the loan proceeds.
- Financial Needs. Quantitative information on the borrower’s financial needs for the remainder of 2020, including expected revenues, operating costs, and credit, and how the loan will address those needs together with other sources of funding and financing.
- Operating Plan. A discussion of the borrower’s operating plan for the remainder of 2020 if the loan is approved, including how the proposed loan fits within the borrower’s business plan and an analysis showing that the loan is prudently incurred.
- Cost Restructuring. A description of any plans the borrower has to restructure its obligations, contracts, staffing, or organization to improve the borrower’s financial condition.
We will continue to update our guidance as more information becomes available from the federal government. In the meantime, if your mid-sized business is considering applying for a CARES Act loan, we suggest consulting with your legal and financial advisors now, so that you can be prepared when the application process begins.
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