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LawFlash

CARES Act and Federal Reserve Offer Economic Assistance to Stabilize US Economy

April 13, 2020 (Updated July 29, 2020)

The Federal Reserve took additional actions on April 9 to provide up to $2.3 trillion in loans to support the US economy during the coronavirus (COVID-19) pandemic. This LawFlash covers the new and expanded programs, and provides comprehensive coverage of the Coronavirus Economic Stabilization Act.

The Federal Reserve will do the following:

  • Purchase up to $600 billion in loans through the Main Street Lending Program (MSLP). The US Department of the Treasury, using funding from the CARES Act, will provide $75 billion in equity to the facility. The Federal Reserve expects to begin funding in early June.
  • Bolster the Small Business Administration's (SBA’s) Paycheck Protection Program (PPP) by supplying liquidity to participating financial institutions. The PPP Liquidity Facility (PPPLF) will extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value.
  • Expand the size and scope of the Primary and Secondary Market Corporate Credit Facilities (PMCCF and SMCCF) and the Term Asset-Backed Securities Loan Facility (TALF). These three programs will now support up to $850 billion in credit backed by $85 billion in credit protection from the Treasury.
  • Establish a Municipal Liquidity Facility that will offer up to $500 billion in lending to US states and municipalities. The Treasury will provide $35 billion of credit protection to the Federal Reserve for this facility using funds appropriated by the CARES Act.

LATEST UPDATE: On June 15, the Federal Reserve and the Treasury announced they are seeking comments on two facilities designed to support lending to nonprofit organizations: (1) the Nonprofit Organization New Loan Facility (NONLF) and (2) the Nonprofit Organization Expanded Loan Facility (NOELF). Comments on the proposed NONLF and NOELF term sheets will be accepted through June 22, 2020.

On June 8, the Federal Reserve took further actions to update the terms of the MSLP in order to allow more small and medium-sized businesses to be able to receive support. Per such updates, the changes include, among others:

  • Lowering the minimum loan size for certain loans to $250,000 from $500,000
  • Increasing the maximum loan size for all facilities
  • Increasing the term of each loan option to five years from four years
  • Extending the repayment period for all loans by delaying principal payments for two years rather than one
  • Raising the Federal Reserve’s participation to 95% for all loan

MAIN STREET LENDING PROGRAM

The Treasury and the Federal Reserve announced the MSLP program on April 9 and expanded the scope and eligibility of the facilities on April 30.

On June 8, the Federal Reserve updated the term sheets for the New, Priority, and Expanded Main Street Loan Facilities; the Priority Main Street Loan Facility (described below); and released updated Main Street Lending Program Frequently Asked Questions. Key updates include the following:

  • An eligible borrower must have been in existence prior to March 13, 2020.
  • In determining how many employees a borrower has, it must follow the framework set out in the SBA’s regulation at 13 CFR 121.106, which requires the borrower to count its own employees and those employed by its affiliates in accordance with the affiliation analysis generally applied by the SBA (borrower must count as employees all full-time, part-time, seasonal, or otherwise employed persons, excluding volunteers and independent contractors).
  • In determining its 2019 annual revenue, a borrower must aggregate its revenues with the revenue of its affiliates, consistent with the affiliation analysis the SBA applies to its loan programs.
  • In determining its 2019 annual revenue, a borrower may use (1) a GAAP revenue measure set forth in its 2019 annual audited financial statements, (2) its “receipts” (as defined in 13 CFR 121.10(a)) as reported to the IRS in its fiscal year 2019 tax returns, or (3) its most recent audited financial statements or tax returns if the 2019 statements or returns are not available yet.
  • Eligible lenders include US branches or agencies of foreign banks as well as US intermediate holding companies of foreign banking organizations.
  • Main Street loans will be London Inter-bank Offered Rate (LIBOR)-based, not Secured Overnight Financing Rate (SOFR)-based.
  • Principal payments are deferred for two years and interest payments are deferred for one year. Interest otherwise due in the first year will be capitalized and not entirely deferred.
  • Borrowers are allowed to use adjusted 2019 earnings before interest, taxes, depreciation, and amortization (EBITDA) in determining their eligible loan size.
  • Lenders may calculate adjusted 2019 EBITDA in a manner consistent with previous adjusted EBITDA calculations for the same borrower, or in a manner consistent with adjusted EBITDA calculations for similarly situated borrowers, in each case, applicable prior to April 24, 2020. However, if an eligible borrower is the only business in its affiliated group that has sought funding through the MSLP, its affiliated group’s debt and EBITDA are not relevant to determining whether such borrower can qualify, except to the extent that such borrower’s subsidiaries are consolidated into its financial statements.
  • EBITDA is the key underwriting metric, not an asset-based test, though this continues to be under review by the Federal Reserve and the Treasury.
  • Lenders may apply their own underwriting standards in evaluating an eligible borrower’s eligibility for a Main Street loan.
  • In calculating the maximum loan size, “existing outstanding and undrawn available debt” includes all amounts borrowed under any loan facility, including unsecured or secured loans from any bank, non-bank financial institution, or private lender, as well as any publicly issued bonds or private placement facilities. It also includes all unused commitments under any loan facility, excluding (1) any undrawn commitment serving as a backup line for commercial paper issuance, (2) any undrawn commitment used to finance receivables (including seasonal financing of inventory), (3) any undrawn commitment that cannot be drawn without additional collateral, and (4) any undrawn commitment no longer available due to a change in circumstance.Existing outstanding and undrawn available debt must be calculated as of the date of the loan application. 
  • An S corporation or other tax pass-through entity may make capital distributions to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings.
  • All Main Street loans may be secured.
  • Main Street New Loans may not be contractually subordinated in right of payment to any other debt.
  • If a borrower under the Main Street New Loan Facility had other loans outstanding with the Main Street lender as of December 31, 2019, such loans must have had an internal risk rating equivalent to a “pass” in the Federal Financial Institutions Examination Council’s (FFIEC’s) supervisory rating system as of December 31, 2019 if the eligible lender purchased its interest in the underlying loan prior to December 31, 2019, or as of the date of origination of the Main Street Expanded Loan Facility (MSELF) Upsized Tranche if the eligible lender purchased its interest in the underlying loan after December 31, 2019. The eligible lender is not required to have been the eligible lender that originally extended the loan underlying the MSELF Upsized Tranche, as long as it purchased the interest in the loan before April 24, 2020.
  • Non-bank financial institutions remain ineligible as lenders, although the Federal Reserve and the Department of the Treasury continue to evaluate lender eligibility.
  • Borrowers may (1) repay existing debt at existing stated maturity and at scheduled times under the existing debt, (2) repay a line of credit (including a credit card line) in accordance with the borrower’s normal course of business usage for such line of credit, (3) take on and pay additional debt obligations required in the normal course of business and on standard terms, including inventory and equipment financing, provided that such debt is secured only by newly acquired property (e.g., inventory or equipment), and, apart from such security, is of equal or lower priority than the applicable Main Street loan, or (4) refinancing maturing debt. Principal and interest payments are “mandatory and due” (a) on the future date upon which they were scheduled to be paid as of the date of origination of the applicable Main Street loan, or (b) upon occurrence of an event that triggers mandatory prepayments under a contract for indebtedness executed prior to the date of origination of the applicable Main Street loan (any such prepayment triggered by incurrence of new debt can only be paid if such prepayments are de minimis or under the Main Street Priority Loan Facility (MSPLF) at the time of origination of an MSPLF Loan).
  • Lenders may cancel or terminate existing lines of credit during an “event of default.” The prohibition against canceling or reducing any existing lines of credit does not prevent (a) reduction or termination of existing uncommitted undrawn lines of credit, (b) expiration of existing lines of credit in accordance with their terms, or (c) the reduction of availability under existing lines of credit in accordance with their terms due to changes in borrowing bases or reserves in asset-based or similar structures. The guidance is not clear as to whether this is an event of default under the Main Street Loan Program or if it captures an event of default under any other document with the Main Street lender.

Additional guidance on the MSLP can be found here:

Eligibility. The MSLP offers term loans to US businesses established prior to March 13, 2020 that either (1) employ 15,000 or fewer employees or (2) had $5 billion or less in annual revenue in 2019. To be eligible, a borrower must be “a business that is created or organized in the United States or under the laws of the United States with significant operations in and a majority of its employees based in the United States.”

Eligible lenders under the MSLP include US federally insured depository institutions (including banks, savings associations, and credit unions), US branches or agencies of foreign banks, US bank holding companies, US savings and loan holding companies, US intermediate holding companies of foreign banking organizations, and US subsidiaries of any of the foregoing.

Eligible lenders are expected to conduct an assessment of each potential borrower’s financial condition at the time of the borrower’s application before originating new Main Street loans or using Main Street loans to increase the amount of loans under existing credit facilities to eligible businesses.

In order to be eligible, borrowers must not have received specific support pursuant to the Coronavirus Economic Stabilization Act of 2020 (Subtitle A of Title IV of the CARES Act) and must not participate in the PMCCF (as defined below). However, borrowers that have taken advantage of the PPP or obtained an Economic Injury Disaster Loan may also borrow Main Street loans.

Main Street Lending Facilities. Borrowers can only participate in one of the three MSLP facilities described below:

  1. Main Street New Loan Facility. An eligible loan is a secured or unsecured term loan originated after April 24, 2020. Minimum term loan size is $250,000, and the maximum is the lesser of (1) $35 million or (2) an amount that, when added to the borrower’s existing outstanding and undrawn available debt, does not exceed four times the borrower’s adjusted 2019 EBITDA. Main Street loans may not be, at any time, contractually subordinated in terms of priority to any of the borrower’s other unsecured loans or debt instruments. If the borrower had other loans outstanding with the Main Street lender as of December 31, 2019, such loans must have had an internal risk rating equivalent to a “pass” in the FFIEC’s supervisory rating system as of December 31, 2019.
  2. Main Street Priority Loan Facility. An eligible loan is a secured or unsecured term loan originated after April 24, 2020. Minimum term loan size is $250,000, and the maximum is the lesser of (1) $50 million or (2) an amount that, when added to the borrower’s outstanding and undrawn available debt, does not exceed six times the borrower’s adjusted 2019 EBITDA. At the time of origination and at all times the loan is outstanding, the loan must be senior to or pari passu with, in terms of payment and lien priority, the borrower’s other loans or debt instruments (other than mortgage debt solely with respect to lien priority). If the borrower had other loans outstanding with the Main Street lender as of December 31, 2019, such loans must have had an internal risk rating equivalent to a “pass” in the FFIEC’s supervisory rating system as of December 31, 2019.
  3. Main Street Expanded Loan Facility. An eligible loan is a secured or unsecured term loan or revolving credit facility, made by an eligible lender, that was originated on or before April 24, 2020 and has a remaining maturity of at least 18 months (taking into account any adjustments made to the maturity of the loan after April 24, 2020, including at the time of upsizing); provided that the upsized tranche of the loan has all of the required features. Minimum loan size is $10 million, and the maximum is the least of (1) $300 million, or (2) an amount that, when added to the borrower’s existing outstanding and undrawn available debt, does not exceed six times the borrower’s adjusted 2019 EBITDA. At the time of upsizing, and at all times the upsized tranche is outstanding, the upsized tranche must be senior to or pari passu with, in terms of payment and lien priority, the borrower’s other loans or debt instruments (other than mortgage debt). The eligible loan must have had an internal risk rating equivalent to a “pass” in the FFIEC’s supervisory rating system as of an applicable date. If the loan underlying a Main Street upsized tranche is part of a multi-lender facility, the eligible lender must be one of the lenders holding an interest in the underlying loan at the date of upsizing. Only the eligible lender for the Main Street upsized tranche is required to meet the eligible lender criteria. Other members of the multi-lender facility are not required to be eligible lenders. Multiple lenders under an existing multilender facility may “upsize” the existing facility to originate an MSELF Upsized Tranche. For purposes of sale of participation interest, each such tranche will need to be separately submitted by each lender to the related special purpose vehicle (SPV).

Main Street Loan Terms.

  • Five-year maturity
  • Interest rates equal to LIBOR (one or three months) plus 300 basis points
  • Principal payments deferred for two years and interest payments deferred for one year (unpaid interest will be capitalized); prepayment of loan permitted without premium or penalty
  • Amortization for all three facilities: Principal amortization of 15% at the end of the third year, 15% at the end of the fourth year, and a balloon payment of 70% at maturity at the end of the fifth year

Lender Required Certifications & Covenants. In addition to other certifications required by applicable statutes and regulations, the following certifications and covenants will be required of the Main Street lender:

  • It will not request that the borrower repay the principal amount of the debt extended by the Main Street lender, or pay interest on such outstanding obligations, until the Main Street loan (or the upsized tranche, as applicable) is repaid in full, unless the principal payment or interest payment is mandatory and due, or in the case of an event of default and acceleration.
  • The lender will not cancel or reduce any existing committed lines of credit to the borrower, except upon the occurrence of an event of default.
  • The methodology used for calculating the borrower’s adjusted 2019 EBITDA for the applicable leverage requirement is the methodology it previously used for adjusting EBITDA when (1) in respect of the New Loan or the Priority Loan Facilities, extending credit to the Main Street borrower or similarly situated borrowers on or before April 24, 2020; or (2) in respect of the Expanded Loan Facility, originating or amending the eligible loan (as applicable) on or before April 24, 2020.
  • No member of Congress, head of a US federal executive department, the US president or vice president, or family members of any of these individual has a controlling interest in the borrower.

A Main Street lender is expected to obtain the borrower-required certifications and covenants from each borrower at the time of origination (or upsizing, as applicable) of the Main Street loan. Lenders may rely on a borrower’s certifications and covenants, as well as any subsequent self-reporting by the borrower.

Lenders will apply their own underwriting standards in evaluating the financial condition and creditworthiness of a potential borrower. A Main Street lender ultimately determines whether an eligible borrower is approved for a loan under the MSLP. As such, businesses that otherwise meet the eligible borrower requirements may not be approved for a loan or may not receive the maximum allowable amount.

Borrower Required Certifications and Covenants. In addition to other certifications required by applicable statutes and regulations, the following certifications and covenants will be required of the borrower, among others:

  • It will not repay the principal balance of, and interest on, any debt, unless the debt or interest payment is mandatory and due, until (a) the Main Street loan (or the upsized tranche of the Main Street loan, as applicable) is repaid in full or (b) neither the SPV nor a governmental assignee holds an interest in the applicable loan in any capacity. Borrowers under the Priority Loan Facility may, at the time of origination of the Main Street loan, refinance existing debt owed by the borrower to a lender that is not the Main Street lender.
  • It will not seek to cancel or reduce any of its committed lines of credit with the Main Street lender or any other lender.
  • It has a reasonable basis to believe that, as of the date of origination (or upsizing, as applicable) of the Main Street loan and after giving effect to such loan, it has the ability to meet its financial obligations for at least the next 90 days and does not expect to file for bankruptcy during that time period.
  • It will follow compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs (described below) under Section 4003(c)(3)(A)(ii) of the CARES Act, except that an S corporation or other tax pass-through entity may make distributions to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings.
  • No member of Congress, head of an executive department, the US president or vice president, or family member of any of these individuals has a controlling interest in the borrower.

Retaining Employees. Borrowers should make commercially reasonable efforts to maintain payroll and retain their employees during the time the Main Street loan (or the upsized tranche of the Main Street loan, as applicable) is outstanding. Specifically, borrowers should undertake good-faith efforts to maintain payroll and retain employees, in light of their capacities, the economic environment, available resources, and the business need for labor. Borrowers that have already laid off or furloughed workers as a result of the disruptions from COVID-19 are eligible to apply for Main Street loans.

Financial Information. For Main Street loans originated after June 28, 2020, a borrower is required to provide a lender with its (a) 2019 financial records as required under section 4.A of the Borrower Certifications and Covenants and (b) most recent financial data required per Table II of Appendix C to the FAQ, which vary by Main Street facility). For Main Street loans originated on or before June 28, 2020, the only financial disclosures a borrower is required to provide a lender are the 2019 financial records set out in clause (a). Lenders may require other financial information as appropriate under their underwriting practices

Restrictions under Section 4003(c)(3)(A)(ii) of the CARES Act.

  • Stock buybacks of equity listed on a national securities exchange: Through the life of the loan, plus one year
    • Exception: Repurchases under a contractual obligation in effect as of March 27, 2020 are permitted 
  • Dividends and capital distributions: Through the life of the loan, plus one year (the Treasury secretary may waive this limitation)
    • Exceptions: S corporations and other tax pass-through entities may continue to make distributions to the extent reasonably required to cover their owners’ tax obligations in respect of the entity’s earnings. Preferred stock or any other equity interest in a borrower that provides for mandatory or preferential payment of dividends or other distributions shall be subject to these restrictions unless both the equity interest and the obligation to pay dividends or distributions existed as of March 27, 2020.
  • Executive bonuses: Through the life of the loan, plus one year:
    • Officers and employees who received more than $425,000 in total compensation in 2019 cannot receive more than their 2019 compensation and cannot receive severance pay of more than twice their 2019 compensation; and
    • officers and employees who received more than $3 million in total compensation in 2019 cannot receive, during any 12-consecutive-month period, more than $3 million plus 50% of their excess compensation over $3 million.

Total Compensation. Total compensation includes salary, bonuses, awards of stock, and other financial benefits provided by the borrower and its affiliates to an officer or employee of the borrower, but does not include benefits paid in connection with a termination of employment (e.g., severance pay). A borrower that is a public company, or is a consolidated subsidiary of a public company, must calculate total compensation according to the methodology set out in item 402(c) of Regulation S-K (item 402(c)) (17 CFR 229.402(c)(2)). A borrower that is not a public company may choose to calculate total compensation (1) by using item 402(c) or (2) in a manner consistent with the federal tax rules, if the borrower meets certain criteria outlined by the Federal Reserve Bank of Boston. A borrower that has chosen to use the federal tax rules may later be required to switch to using item 402(c) if (1) such borrower later becomes a public company or (2) such borrower’s officers or employees that were not Significant Deferred Compensation Recipients later become Significant Deferred Compensation Recipients (exception: a borrower that had gross revenues of less than or equal to $10,000 for its 2019 fiscal year is exempt unless it becomes a public company).

Loan Participations. As part of the Main Street Lending Program, the Federal Reserve Bank of Boston will commit to lend to a single common SPV on a recourse basis. The SPV will purchase a 95% participation in Main Street loans generated under the each of the three facilities under the MSLP.

The sale of a participation to the SPV will be structured as a “true sale” and must be completed expeditiously after the applicable loan’s origination or upsizing.

  • Main Street lenders would retain 5% of each Main Street loan. Under the New Loan and Priority Loan Facilities, the Main Street lender must retain its portion of the loan until (a) the earlier of loan maturity or (b) neither the SPV nor a governmental assignee holds an interest in the applicable loan in any capacity, whichever comes first. Under the Expanded Loan Facility, the SPV and the Main Street lender will share risk in the upsized tranche on a pari passu basis.
  • The Main Street lender must be one of the lenders holding an interest in the underlying eligible loan at the date of upsizing.
  • The Main Street lender must retain its 5% portion of the upsized tranche of the loan until the upsized tranche matures or the SPV sells all of its 95% participation, whichever comes first.
  • The Main Street lender must also retain its interest in the underlying eligible loan until the underlying loan matures, the upsized tranche of the loan matures, or neither the SPV nor a governmental assignee holds an interest in the upsized tranche in any capacity, whichever comes first. Any collateral securing the underlying eligible loan (at the time of upsizing or on any subsequent date) must secure the upsized tranche on a pari passu basis.

Fees.

  • Transaction Fee: A lender under the New Loan and Priority Loan Facilities will pay to the SPV a transaction fee of 100 basis points of the principal amount of the Main Street loan at the time of origination. A lender under the Expanded Loan Facility will pay to the SPV a transaction fee of 75 basis points of the principal amount of the upsized tranche of the Main Street loan at the time of upsizing The Main Street lender may require the borrower to pay this fee.
  • Loan Origination/Upsizing and Servicing Fee: A borrower under the New Loan and Priority Loan Facilities will pay the Main Street lender an origination fee of 100 basis points of the principal amount of the Main Street loan at the time of origination. A borrower under the Expanded Loan Facility will pay the Main Street lender an origination fee of 75 basis points of the principal amount of the upsized tranche of Main Street loan. The SPV will pay a Main Street lender 25 basis points of the principal amount of its participation in the Main Street loan (or the upsized tranche of the Main Street loan, as applicable) per annum for loan servicing.
  • Consent Fees: Lenders may also charge customary consent fees if such fees are necessary to amend existing loan documentation in connection with the upsizing of a loan under the MSELF.

Facility Termination. The SPV will purchase participation in eligible loans under the MSLP until December 31, 2020, unless the facility is extended. The Federal Reserve Bank of Boston will continue to fund the SPV after such date until the SPV’s underlying assets mature or are sold.

MID-SIZED BUSINESS LENDING PROGRAM

The Coronavirus Economic Stabilization Act (described in more detail below) authorized the secretary of the Treasury to establish a Mid-sized Business Lending Program (in addition to the MSLP) to offer loans, loan guarantees, or other investments provided by banks and other lenders (with an interest rate of less than 2% and no payments due in the first six months) to businesses with between 500 and 10,000 employees that need the loan to support ongoing operations, if the borrower makes a good-faith certification to the following:

  • The borrower will use the funds to retain 90% of its workforce until September 30, 2020.
  • The borrower intends to restore 90% of its payroll as of February 1, 2020 and all compensation and benefits for four months after the termination of the public health emergency.
  • It is a business that is created or organized in the United States or under the laws of the United States with significant operations in and a majority of its employees based in the United States.
  • It is not a debtor in a bankruptcy proceeding.
  • It will not pay dividends to common stock or repurchase equity security for the term of the loan.
  • It will not outsource or offshore jobs through the life of the loan plus two years.
  • It will not abrogate existing collective bargaining agreements through the life of the loan plus two years.
  • It will remain neutral in union organizing efforts for the term of the loan.

PAYCHECK PROTECTION PROGRAM LENDING FACILITY

Under the PPPLF, the Federal Reserve Banks will lend to eligible borrowers on a non-recourse basis, taking the SBA’s PPP loans as collateral. All depository institutions that originate PPP loans are eligible to borrow under the PPPLF. Eligible borrowers participate in the PPPLF through the Reserve Bank in whose district the eligible borrower is located.

  • Maturity and Acceleration: The maturity date will equal the maturity date of the PPP loan pledged to secure the extension of credit. The maturity date of the PPPLF’s extension of credit will be accelerated if the underlying PPP loan goes into default and the eligible borrower sells the loan to the SBA to realize on the SBA guarantee. The maturity date of the PPPLF’s extension of credit also will be accelerated to the extent of any loan forgiveness reimbursement received by the eligible borrower from the SBA. A PPP loan will be assigned a risk weight of 0%.
  • Interest Rate: Extensions of credit will be made at an interest rate of 35 basis points.
  • Fees: None.
  • Facility Termination: No new extensions of credit will be made after December 31, 2020, unless the program is extended.

PRIMARY MARKET CORPORATE CREDIT FACILITY

The PMCCF will serve as a funding backstop for corporate debt issued by eligible issuers. In combination with the SMCCF, the PMCCF will support up to $750 billion in credit. The PMCCF may purchase eligible corporate bonds as the sole investor in a bond issuance. The PMCCF is expected to become operational in the near future. 

Eligible corporate bonds must be (1) issued by an eligible issuer and (2) have a maturity of four years or less at the time of bond purchase by the facility. The PMCCF may also purchase portions of syndicated loans or bonds of eligible issuers at issuance.

Eligible syndicated loans and bonds must be (1) issued by an eligible issuer and (2) have a maturity of four years or less at the time of purchase by the facility.

The PMCCF may purchase no more than 25% of any loan syndication or bond issuance. The maximum amount of instruments that the PMCCF and the SMCCF combined will purchase with respect to any eligible issuer is capped at 1.5% of the combined potential size of the PMCCF and the SMCCF. Issuers may not participate in the PMCCF and a Main Street Lending Facility. The PMCCF will cease purchasing eligible assets by December 31, 2020, unless the facility is extended.

To qualify as an eligible issuer, the issuer must satisfy the following conditions:

  • The issuer is a business that is created or organized in the United States or under the laws of the United States with significant operations in and a majority of its employees based in the United States.
  • It was rated at least BBB-/Baa3 as of March 22, 2020, by a major nationally recognized statistical rating organization (NRSRO). Issuers rated at least BBB-/Baa3 as of March 22 but subsequently downgraded must be rated at least BB-/Ba3 at the time the PMCCF makes a purchase.
  • It is not an insured depository institution or depository institution holding company, as defined in the Dodd-Frank Act.
  • It has not received specific support pursuant to the CARES Act or any subsequent federal legislation.
  • No member of Congress, head of a US federal executive department, the US president or vice president, or family member of any of these individuals has a controlling interest in the issuer.

An eligible issuer will be required to certify that (1) it is unable to secure adequate credit accommodations from banking institutions and capital markets, and (2) it is not insolvent. Further information on required certifications will be publicly announced prior to commencement of the PMCCF.

To qualify as an eligible seller, the seller must be organized under US law and have a majority of employees in the United States. The seller must also satisfy the conflicts-of-interest requirements under section 4019 of the CARES Act.

Pricing.

  • Eligible corporate bonds: Pricing will be issuer-specific, informed by market conditions, plus a 100 basis point facility fee.
  • Eligible syndicated loans and bonds: The PMCCF will receive the same pricing as other syndicate members, plus a 100 basis point facility fee on the PMCCF’s share of the syndication.

SECONDARY MARKET CORPORATE CREDIT FACILITY

Under the SMCCF, the Federal Reserve Bank of New York will lend, on a recourse basis, to an SPV that will purchase corporate debt issued by eligible issuers in the secondary market. In combination with the PMCCF, the SMCCF will support up to $750 billion in credit. The SMCCF began purchasing eligible exchange-traded funds (ETFs) on May 12 and corporate bonds on June 16.

Individual Corporate Bonds. The SMCCF may purchase individual corporate bonds that (1) were issued by an eligible issuer, (2) have a remaining maturity of five years or fewer, and (3) were sold to the facility by an eligible seller. The maximum amount of corporate bonds of a single issuer that the SMCCF will purchase is capped at 10% of the issuer’s maximum bonds outstanding on any day between March 22, 2019, and March 22, 2020.

Broad Market Index Bonds. The SMCCF may also purchase corporate bonds to create a corporate bond portfolio that tracks a broad, diversified market index of US corporate bonds. The SMCCF may purchase corporate bonds that, at the time of purchase, (1) are issued by an issuer that is created or organized in the United States or under the laws of the United States; (2) are issued by an issuer that meets the rating requirements for eligible individual corporate bonds; (3) are issued by an issuer that is not an insured depository institution, depository institution holding company, or subsidiary of a depository institution holding company, as such terms are defined in the Dodd-Frank Act; and (4) have a remaining maturity of five years or fewer.

Exchange-Traded Funds. The SMCCF may also purchase US-listed ETFs whose investment objective is to provide broad exposure to the market for US corporate bonds. The preponderance of ETF holdings will be of ETFs whose primary investment objective is exposure to US investment-grade corporate bonds, and the remainder will be in ETFs whose primary investment objective is exposure to US high-yield corporate bonds. The SMCCF will cease purchasing eligible assets by December 31, 2020, unless the facility is extended. The SMCCF will not purchase shares of a particular ETF if, after such purchase, the SMCCF would hold more than 20% of that ETF’s outstanding shares.

The SMCCF will not purchase bonds of issuers that have filed for bankruptcy. The SMCCF will cease purchasing eligible assets by December 31, 2020, unless the facility is extended. To qualify as an eligible issuer of an eligible individual corporate bond, the issuer must satisfy the following conditions:

  • The issuer is a business that is created or organized in the United States or under the laws of the United States with significant operations in and a majority of its employees based in the United States.
  • It was rated at least BBB-/Baa3 as of March 22, 2020, by a major NRSRO. An issuer rated at least BBB-/Baa3 as of March 22 but subsequently downgraded must be rated at least BB-/Ba3 as of the date on which the SMCCF makes a purchase.
  • It is not an insured depository institution or depository institution holding company, as defined in the Dodd-Frank Act.
  • It has not received specific support pursuant to the CARES Act or any subsequent federal legislation.
  • No member of Congress, head of a US federal executive department, the US president or vice president, or family member of any of these individual has a controlling interest in the issuer.

To qualify as an eligible seller, the seller must make the following certifications:

  • It is solvent.
  • It is organized under US law and has a majority of employees in the United States.
  • It satisfies the conflicts-of-interest requirements under section 4019 of the CARES Act.

A seller must complete the Seller Certification Packet and provide a signed version of the materials via PDF to CCFForms@ny.frb.org. A seller also must agree to a verification mechanism for the US business and conflicts-of-interest requirements.

Pricing. The SMCCF will purchase eligible individual corporate bonds and eligible broad market index bonds at fair market value in the secondary market. The facility will avoid purchasing shares of eligible ETFs when they trade at prices that materially exceed the estimated net asset value of the underlying portfolio.

TERM ASSET-BACKED SECURITIES LOAN FACILITY

The TALF will serve as a funding backstop to facilitate the issuance of eligible asset-backed securities on or after March 23, 2020. Under the TALF, the Federal Reserve Bank of New York will lend to an SPV on a recourse basis. The TALF SPV will initially make up to $100 billion of loans available.

The loans will (1) have three-year terms, (2) be nonrecourse to the borrower, and (3) be fully secured by eligible asset-backed securities. Substitution of collateral during the term of the loan generally will not be allowed. Eligible borrowers and issuers of eligible collateral will be subject to the conflict of interest requirements of CARES Act section 4019.

Eligible Borrowers. Eligible borrowers include businesses that (1) are created or organized in the United States or under the laws of the United States, (2) have significant operations in and a majority of their employees based in the United States, and (3) maintain an account relationship with a primary dealer.

Eligible Collateral.

  • Eligible collateral includes US dollar denominated cash asset-backed securities that have a credit rating in the highest long-term or, if no long-term rating is available, the highest short-term investment-grade rating category from at least two eligible NRSROs and do not have a credit rating below the highest investment-grade rating category from an eligible NRSRO.
  • All or substantially all of the credit exposures underlying eligible asset-backed securities must have been originated by a US company, and the issuer of eligible collateral must be a US company.
  • Eligible asset-backed securities must be issued on or after March 23, 2020. Commercial mortgage-backed securities issued on or after March 23, 2020, will not be eligible. SBA Pool Certificates or Development Company Participation Certificates must be issued on or after January 1, 2019.
  • All or substantially all of the underlying credit exposures must be newly issued (other than for commercial mortgage-backed securities) and must (1) for newly issued asset-backed securities, except for collateralized loan obligations, be originated by US‐organized entities (including US branches or agencies of foreign banks), (2) for collateralized loan obligations, have a lead or a co‐lead arranger that is a US‐organized entity (including a US branch or agency of a foreign bank), and (3) for all asset-backed securities (including collateralized loan obligations and commercial mortgage-backed securities), be to US‐domiciled obligors or with respect to real property located in the United States or one of its territories.
  • The underlying credit exposures must be one of the following:
    • Auto loans and leases
    • Student loans
    • Credit card receivables (both consumer and corporate)
    • Equipment loans and leases
    • Floorplan loans
    • Premium finance loans for property and casualty insurance
    • Certain SBA-guaranteed small business loans
    • Leveraged loans
    • Commercial mortgages

Fees. The TALF SPV will assess an administrative fee equal to 10 basis points of the loan amount on the settlement date for collateral.

View the updated May 12 term sheet on the TALF.

MUNICIPAL LIQUIDITY FACILITY

The Federal Reserve of New York released a notice of interest on May 15 for Eligible Issuers to express interest in selling notes to the Municipal Liquidity Facility SPV. Completing the notice of interest is the initial step for an Eligible Issuer to provide eligibility information to the SPV for review. An Eligible Issuer should submit a notice of interest only when it has determined its financial needs and schedule.

The Municipal Liquidity Facility will support lending to US states and the District of Columbia, US cities with a population exceeding 250,000 residents, and US counties with a population exceeding 500,000 residents. Under this program, a Federal Reserve Bank will lend to an SPV on a recourse basis.

The SPV will purchase eligible notes directly from eligible issuers at the time of issuance. The SPV will have the ability to purchase up to $500 billion of eligible notes. Notes purchased by the SPV are callable by the eligible issuer at any time at par. The eligible notes purchased by the SPV may be prepaid by the eligible issuer at any time, in whole or in part, at par (or par plus unamortized premium for notes purchased at a premium) plus accrued interest, prior to maturity with the approval of the SPV. 

Eligible Notes. Eligible notes are tax anticipation notes, tax and revenue anticipation notes, bond anticipation notes, and other similar short-term notes that are newly issued by eligible issuers and that mature no more than three years from the date of issuance. Relevant legal opinions and disclosures will be required as determined by the Federal Reserve prior to purchase. The Federal Reserve is considering expanding the types of eligible notes to include bonds issued by a limited number of governmental revenue authorities, and may make an announcement on this issue in the near future.

Security for eligible notes will be subject to review and approval by the Federal Reserve and generally be expected to represent general obligations of the eligible issuer, or be backed by tax or other specified governmental revenues of the applicable State, City, or County (defined further below). If the eligible issuer is a Multi-State Entity, the eligible notes will be expected to be parity obligations of existing debt secured by a senior lien on the Multi-State Entity’s gross or net revenues.

Eligible Issuer. An eligible issuer is a US State, City, County (or, subject to Federal Reserve review and approval, an instrumentality that issues on behalf of the State, City, or County for the purpose of managing its cash flows), or a Multi-State Entity.

For purposes of the facility, a “State” is one of the 50 US states or the District of Columbia; a “City” is a US city with a population exceeding 250,000 residents; a “County” is a US county with a population exceeding 500,000 residents based on the most recent available US Census data as of April 6, 2020; and a Multi-State Entity is an entity that was created by a compact between two or more States, which compact has been approved by Congress. Only one issuer per State, City, or County is eligible. An Eligible Issuer may not be insolvent.

  • An Eligible Issuer that is a State, City, or County must have been rated at least BBB-/Baa3 as of April 8, 2020, by two or more NRSROs. Eligible Issuers that were downgraded as of April 8, 2020 must be rated at least BB-/Ba3 by two or more major NRSROs at the time the Facility makes a purchase.
  • An Eligible Issuer that is a Multi-State Entity must have been rated at least A-/A3 as of April 8, 2020, by two or more major NRSROs. A Multi-State Entity that was downgraded as of April 8, 2020 must be rated at least BBB-/Baa3 by two or more major NRSROs at the time the Facility makes a purchase.
  • If a State, City, County, or Multi-State Entity was rated by only one major NRSRO as of April 8, 2020, it may be an Eligible Issuer if (1) the rating was at least BBB-/Baa3 (for a State, City, or County) or A-/A3 (for a Multi-State Entity); (2) the State, City, County, or Multi-State Entity is rated by at least two major NRSROs at the time the facility makes a purchase; and (3) such ratings are at least BB-/Ba3 (for a State, City, or County) or BBB-/Baa3 (for a Multi-State Entity).

Limit per State, City, County, and Multi-State Entity. The SPV may purchase eligible notes issued by or on behalf of a State, City, or County in one or more issuances of up to an aggregate amount of 20% of the general revenue from its own sources and utility revenue of the applicable State, City, or County government for fiscal year 2017. The SPV may purchase eligible notes issued by or on behalf of a Multi-State Entity in one or more issuances of up to an aggregate amount of 20% of the Multi-State Entity’s gross revenue as reported in its audited financial statements for fiscal year 2019.

States and Multi-State Entities may request that the SPV purchase eligible notes in excess of the applicable limit in order to assist political subdivisions and instrumentalities that are not eligible.

Pricing. If interest on the notes is excluded from gross income for federal income tax purposes, pricing will be at a fixed interest rate based on a comparable maturity overnight index swap (OIS) rate plus the applicable spread based on the long-term rating of the security. If interest is not excluded from gross income for federal income tax purposes, pricing will be at a fixed interest rate calculated by (i) adding the comparable maturity OIS rate to the spread that would apply if the notes were tax-exempt, and (ii) dividing the sum calculated under clause (i) by 0.65. View the Municipal Liquidity Facility pricing appendix.

Origination Fee. Each eligible issuer must pay an origination fee equal to 10 basis points of the principal amount of the eligible issuer’s notes purchased by the SPV, and such fee may be paid from the proceeds of the issuance.

Eligible Use of Proceeds. An eligible issuer may use the proceeds of eligible notes purchased by the SPV to manage the cash flow impact of income tax deferrals, reductions of tax and other revenues, or increases in expenses related to or resulting from COVID-19, and requirements for the payment of principal and interest on obligations of the relevant state, city, or county.

An eligible issuer other than a Multi-State Entity may use the proceeds of the notes purchased by the SPV to purchase similar notes issued by, or to assist, political subdivisions and instrumentalities of the relevant state, city, or county.

Termination Date. The SPV will cease purchasing eligible notes on December 31, 2020, unless the program is extended. A Federal Reserve Bank will continue to fund the SPV after such date until the SPV’s underlying assets mature or are sold.

View the Federal Reserve Bank of New York’s April 27 FAQ on the Municipal Liquidity Facility.

View the Federal Reserve Bank of New York’s updated May 15 FAQ on the Municipal Liquidity Facility.

THE CORONAVIRUS ECONOMIC STABILIZATION ACT

The Coronavirus Economic Stabilization Act, found in Title IV, Subtitle A of the CARES Act, authorizes the secretary of the Treasury to make loans, loan guarantees, and other investments of up to $500 billion to support certain eligible businesses, including US businesses that have not otherwise received adequate relief in the form of loan or loan guarantees under the CARES Act, air carriers, and businesses “critical to maintaining national security.”

The Coronavirus Economic Stabilization Act will provide immediate liquidity to the airline industry through a combination of direct loans and loan guarantees, as well as indirect loans and other investments to entities that finance airlines.

Key features of the act include the following:

  • Up to $25 billion in loans and loan guarantees for passenger air carriers
  • Up to $4 billion in loans and loan guarantees for cargo air carriers
  • Up to $17 billion in loans and loan guarantees for “businesses critical to maintaining national security”
  • The bulk of the available assistance—up to $454 billion and any unused amounts in the previous categories—will be made available as loans or loan guarantees to eligible businesses.

Businesses Critical to Maintaining National Security. To meet the Treasury’s criteria, at the time of application, a business must be

  • performing under a “DX”-priority rated contract or order under the Defense Priorities and Allocations System regulations (15 CFR part 700); or
  • ·operating under a valid top secret facility security clearance under the National Industrial Security Program regulations (32 CFR part 2004).

Businesses that do not meet either of these criteria may nonetheless be considered for a loan if the secretary of the US Department of Defense or the US director of national intelligence recommends and certifies that the applicant is “critical to maintaining national security.”

Eligibility Criteria. To qualify for assistance under the Coronavirus Economic Stabilization Act, air carriers and defense businesses and loans/loan guarantees must meet the following conditions:

  • Credit is not otherwise reasonably available.
  • The new obligation is prudently incurred.
  • If there is no security, the loan/loan guaranty must be at a rate that reflects the loan’s risk and is, to the extent practicable, not less than the rate for comparable obligations prior to the COVID-19 outbreak.
  • There must be a five-year limitation on maturity.
  • The business must maintain at least 90% of its existing employment levels as of March 24, 2020.
  • The business must be a business that is created or organized in the United States or under the laws of the United States with significant operations in and a majority of its employees based in the United States.
  • The business suffered “Covered Losses” such that continued operations are jeopardized.

View the Treasury’s March 30 guidance on procedures and minimum requirements for loans under the act.

View the Treasury’s April 6 draft application for air carriers and certain eligible businesses.

View the Treasury’s April 10 Q&A on loans to Air Carriers, Eligible Businesses and National Security Businesses.

View the Treasury’s loan application form for Businesses Critical to Maintaining National Security.

Restrictions on Air Carriers, Defense Businesses, and Direct Loans. Air carriers, defense businesses, and businesses that borrow direct loans under the Coronavirus Economic Stabilization Act are prohibited per the restrictions outlined in “Restrictions under Section 4003(c)(3)(A)(ii) of the CARES Act” above.

CORONAVIRUS COVID-19 TASK FORCE

For our clients, we have formed a multidisciplinary Coronavirus COVID-19 Task Force to help guide you through the broad scope of legal issues brought on by this public health challenge. Find resources on how to cope with the post-pandemic reality on our NOW. NORMAL. NEXT. page and our COVID-19 page to help keep you on top of developments as they unfold. If you would like to receive a daily digest of all new updates to the page, please subscribe now to receive our COVID-19 alerts, and download our biweekly COVID-19 Legal Issue Compendium.

CONTACTS

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Philadelphia
Andrew T. Budreika
Michelle Catchur
Kurt W. Rademacher
Andrew P. Rocks
Benjamin W. Stango

New York
Kristen V. Campana
Crystal Fang

Boston
Sandra J. Vrejan
Ian M. Wenniger

Houston
Elizabeth Khoury Ali
Tara McElhiney

Los Angeles
David V. Chang

Orange County/Los Angeles
Steven L. Miller

Washington, DC
Shah M. Nizami
Katelyn M. Hilferty