CARES Act: The Treasury Department's $500B Coronavirus Economic Stabilization Act Program

President Donald Trump on March 27, 2020, signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), providing $2.2 trillion of emergency appropriations. The CARES Act provides a wide range of economic relief for businesses of all sizes, tax relief for individuals and businesses, enhanced unemployment insurance for individuals and other policies that are summarized here.

This Holland & Knight alert outlines the CARES Act's "Coronavirus Economic Stabilization Act" (CESA) found in Title IV. Title IV authorizes $500 billion to the U.S. Department of the Treasury's Economic Stabilization Fund in an effort to provide businesses, states and municipalities access to sources of liquidity in order to maintain solvency during the coronavirus (COVID-19). Title IV also provides significant housing related relief and restrictions, as well as relief to financial institutions, which will be summarized in a future update.

Program

In Section 4003, CESA authorizes the Treasury Secretary to use $500 billion to backstop one or more Federal Reserve programs and lending facilities as well as provide direct loans and facilitate private lending through the strategic use of guarantees to aviation, national defense industries and businesses generally. CESA provides for the following division of these funds:

• $454 billion in loans for qualifying businesses, states and municipalities
• $25 billion in loans and loan guarantees for passenger air carriers and eligible businesses that are approved to perform inspection, repair, replace or overhaul services that are related to passenger air service, and ticket agents
• $4 billion in loans and loan guarantees for cargo air carriers
• $17 billion in loans and loan guarantees for businesses critical to maintaining national security

The $454 billion listed above is for programs or facilities established by the Board of Governors of the Federal Reserve System (the Federal Reserve) to inject liquidity into the financial system to support lending to eligible businesses, states or municipalities. The Treasury Secretary is given broad authority to determine the terms of the transactions subject to several guideposts in the statute regarding limitations and eligibility.

Limitations on Executive Compensation

For recipients of funds under both Sections 4003 and 4112, discussed below, there are special rules on employee compensation that apply. These requirements are set forth in Sections 4004 and 4116, and cross-referenced to apply to the $454 billion for other eligible businesses in Section 4003(c)(3)(A)(III).

• No officer or employee earning more than $425,000 in 2019, can receive 1) pay increases or 2) severance upon termination of employment exceeding twice the maximum compensation received in 2019 (for funds under Section 4003, this requirement is from the date the agreement is executed until one year after the loan or loan guarantee is no longer outstanding; for funds under Section 4412, this requirement is from March 24, 2020, to March 24, 2022); and
• No officer or employee whose 2019 total compensation exceeded $3 million may receive total compensation in excess of $3 million and 50 percent of the excess over $3 million that they received in 2019, including salary, bonuses, awards of stock and other financial benefits.

Special Terms for Businesses, States and Municipalities

As noted above, CESA includes $454 billion in funds to establish a program to inject liquidity into the financial system that supports lending to eligible businesses, states and municipalities. Should one of the implementing programs include direct lending to businesses, the recipient businesses must agree to the following terms that will be in effect for the term of the loan plus 12 months:

• neither the business nor any affiliate may engage in stock buy-backs unless it is under a preexisting contractual obligation to do so, and
• the business may not pay dividends or make other capital distributions with respect to common stock

CESA also provides that the Treasury Secretary "shall endeavor" to implement a program within the $454 billion that provides financing to banks and other lenders that make direct loans to eligible businesses, including nonprofits with between 500 and 10,000 employees, with an annualized rate not higher than 2 percent. For the first six months of financing under this program, no principal or interest shall be due. While it is not yet clear how this program will contrast with the wider loans, loan guarantees and financing generally available to businesses, CESA details the following required good-faith certifications:

• the loan is necessary for ongoing operations of the recipient
• any funds received will be used to retain at least 90 percent of the recipient's workforce until Sept. 30, 2020
• the recipient must intend to restore not less than 90 percent of its workforce that existed on Feb. 1, 2020, no later than four months after the current crisis
• the recipient is domiciled in the U.S., with significant operations and employees in the U.S.
• the recipient is not in bankruptcy
• the recipient will not pay dividends with respect to common stock, or buy-back shares during the term of the loan
• the recipient will not outsource or offshore jobs for the term of the loan and two years after completing repayment
• the recipient will not abrogate existing collective bargaining agreements during the term of the loan and two years after completing repayment, and
• the recipient will remain neutral in any union organizing effort for the term of the loan

It is important to note that, given the discretionary language of the provision, it remains unclear the degree to which the administration will choose to implement these terms.

Aviation and National Security Industry Programs

With regard to support for the aviation industry, the CARES Act includes more direction to the Treasury Department in establishing a program as compared to other sections of the bill. Included in the aviation specific sections of the CESA are grants to cover employee salaries as well as loans and loan guarantees.

Special Loan Terms for Air Carriers, Cargo Air Carriers and National Security Business

These categories of borrowers have a special set of requirements under the new law, which requires the Treasury Secretary to make the following determinations regarding loans and loan guarantees:

• credit is not otherwise reasonably available to the recipient at the time of the transaction
• the obligation is prudently incurred
• the loan or loan guarantee is sufficiently secured, or is made at a rate that reflects risk and, to the extent practicable, is not less than the interest rate based on market conditions of comparable obligations prior to the COVID-19 outbreak
• the loan or loan guarantee is for as short as practicable, and not longer than five years
• for the length of the loan or loan guarantee plus 12 months, neither the business nor any affiliate may engage in stock buy-backs
• for the length of the loan or loan guarantee plus 12 months, the business may not pay dividends or make other capital distributions with respect to common stock
• until Sept. 30, 2020, the business must maintain its employment levels as of March 24, 2020, to the extent practicable, and in no case can reduce its employment levels by more than 10 percent from that date
• a business must certify that it is created or organized in the U.S. and has both significant operations and a majority of its employees based in the U.S., and
• for the purpose of these loans or loan guarantees, the business must have incurred or is expected to incur covered losses such that continued operations are in jeopardy, as determined by the Treasury Secretary

Furthermore, all air carriers, cargo air carriers and national security businesses that benefit from the financial assistance under CESA must also do the following, as directed by the Treasury Secretary:

• provide the Treasury Department with a warrant or equity interest if the recipient issues securities on a national exchange, or
• provide the Treasury Department with a warrant, other equity interest or senior debt instrument

Employee Retention Grants

In Section 4112, CESA also provides direct relief for aviation workers in the form of grants, which are available solely for the continuation of payments of employee wages, salaries and benefits, including:

• $25 billion for passenger air carriers, in an amount equal to the salaries and benefits reported by the carrier to the U.S. Department of Transportation from April 1 through Sept. 30, 2019;
• $4 billion for cargo air carriers, in an amount that the carrier certifies, using sworn financial statements or other data, as the amount of wages salaries, benefits and other compensation paid from April 1 through Sept. 30, 2019, and
• $3 billion for related contractors, in an amount that the carrier certifies, using sworn financial statements or other data, as the amount of wages salaries, benefits and other compensation paid from April 1 through Sept. 30, 2019

For carriers and contractors accepting funds under the payment of wages, salaries and benefits to aviation workers outlined above, the recipient must comply with the following additional requirements:

• refrain from conducting involuntary furloughs or reducing pay rates and benefits until Sept. 30, 2020
• cannot engage in stock buy-backs or pay dividends or make other capital distributions through Sept. 30, 2020, and
• cannot be required by the federal government to enter into negotiations with labor representatives regarding pay or other terms and conditions of employment

The Treasury Secretary is required to publish streamlined and expedited procedures not later than April 1, 2020, and initial payments are to be made by April 6, 2020. The section also requires related audits and clawback of any financial assistance should the recipient fail to honor assurances, and also authorizes the Secretary of Transportation to require that the carrier maintain scheduled air transportation service as deemed necessary through March 1, 2022, with consideration of the needs of remote communities and the healthcare supply chain.

Main Street Lending Program

Finally, CESA permits, but does not require, the Board of Governors of the Federal Reserve to establish a "Main Street Lending Program," or other similar program or facility under its own unilateral authorities (without the federal backstop provided by the Treasury Department's Economic Stabilization Fund), to support lending to small and mid-sized businesses.

DISCLAIMER: Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in these publications may change on a daily basis. Please contact the author or your responsible Holland & Knight lawyer for timely advice.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.