Client Alert

Brief Overview of CARES Act Loan Programs

27 Mar 2020

The Coronavirus Aid, Relief, and Economic Security Act (the “Cares Act”), establishes two loan programs intended to provide liquidity to businesses in the United States: (1) the Coronavirus Economic Stabilization Act of 2020 (“CESA”), which creates loan programs to be directed by the United States’ Department of the Treasury; and (2) the Keeping American Workers Paid and Employed Act, which creates the Paycheck Protection Program.

Coronavirus Economic Stabilization Act of 2020

1. Authorizes up to $500 Billion in loans and loan guarantees to air carriers and certain qualifying US businesses.

2. $46 Billion is earmarked for air carriers and businesses critical to maintaining national security (the “Specified Treasury Loan Program”). This program will provide direct loans, loan guarantees, and other investments (including purchases of obligations or other interests both directly from issuers and in secondary markets).

3. $454 Billion, plus unused amounts from the Specified Treasury Loan Program, available for loans to other eligible businesses (the “Joint Treasury / Federal Reserve Loan Program”). These loans must be direct loans to businesses and not part of: (i) a syndicated loan, (ii) a loan originated by a financial institution in the ordinary course of business, or (iii) a securities or capital markets transaction.

4. Loan terms are subject to broad discretion given to the Treasury Department, but the duration of the loans or loan guarantees can be no longer than 5 years. For the Specified Treasury Loan Program, the loans will be secured by collateral or be made at a rate that reflects the risk incurred.

5. Businesses receiving assistance are subject to certain restrictions. Both programs limit stock buybacks, dividends, and executive compensation. In addition, the Specified Treasury Loan Program requires minimum employment levels.

6. Applications procedures are not currently available. Procedures for the Specified Treasury Loan Program must be finalized within 10 days following the passage of the bill. There is no time frame for the establishment of procedures for the Joint Treasury / Federal Reserve Loan Program.

The Keeping American Workers Paid and Employed Act

1. $349 billion package that expands the Small Business Administration’s (the “SBA”) existing loan program to provide loans and loan guarantees (“PPP loans”) for qualifying businesses, along with loan forgiveness for loan proceeds used for certain payroll and fixed costs.

2. General Loan Terms:

  • Maximum of $10 million, but subject to SBA formula
  • Interest rate capped at 4% per annum
  • Maximum 10 year term
  • All payments deferred for at least 6 months, but not more than 1 year
  • No personal guarantees or collateral required

3. Limitations on size of businesses that can receive loans and in some circumstances, affiliation rules can apply which can disqualify portfolio companies of private equity and/or venture capital investors

4. Loan proceeds may be used for payroll, group health care, mortgage interest payments, rent, utilities, and certain interest payments on non-mortgage debt.

5. Borrowers may receive forgiveness of the principal of the PPP loans in an amount equaling the costs inacurred or paid in the eight (8) weeks following origination of such loan that relate to payroll costs, mortgage interest, rent, or utilities owed.

6. Amount of loan forgiveness may be reduced if borrower fails to comply with minimum employment and salary requirements.

7. Loan forgiveness will not be deemed to be cancellation of debt for federal tax purposes.

Additional details and questions related to these programs are covered on MoFo’s CARES Act FAQ page.

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