March 26, 2020 - This week Congress is set to pass the CARES Act, a sprawling, 800-page, $2 trillion stabilization package. Title IV of the Act (starting at page 510) includes a $500 Billion program directed by the Secretary of the Treasury (the “Secretary”) and the Federal Reserve Board (the “Fed”) that is designed to stabilize severely stressed sectors of the United States economy by injecting liquidity directly to states, municipalities and companies in the form of loans and other investments. Following is a preliminary analysis of what’s in the bill what it may mean for the broadly syndicated loan market. Bottom line: The program appears to contemplate loans and guarantees in support of non-investment grade and broadly syndicated companies. Note that the specific contours of the program have yet to be designed and the situation is very fluid.
Besides supporting a number of specific businesses (airlines, national security, etc.) Title IV sets aside $454 billion for programs and facilities established by the Fed for businesses that have not otherwise received adequate relief through the CARES Act as well as for states and municipalities. While the Secretary has very broad discretion over the form of loans including covenants and other terms, there are a number of constraints. Importantly, the program is subject to section 13(3) of the Federal Reserve Act which imposes collateralization, taxpayer protection and borrower solvency standards. Loans are available only to U.S. companies and a company must certify that that it has significant operations in the US and that the majority of its employees are based in the US. Such companies must have incurred or expect to incur direct or indirect losses due to the coronavirus that jeopardize their continued operations and no other reasonable sources of can be available to those companies. Loans must be sufficiently secured OR made at a rate that reflects the risk and is to the extent practicable not less than an interest rate based on comparable obligations pre-COVID-19. Duration of loans should be as short as possible but in no event longer than 5 years. The bill limits stock buybacks and dividends or other capital distributions by companies that receive loans (and their affiliates) for the life of the loan and an additional 12 months. A company receiving loans must endeavor to maintain their employment levels through September 30, 2020 at the same as those of March 24, 2020 (but in no case less than 90% of those levels).
The bill also provides that the Secretary can set up a program for mid-sized businesses (500-10,000 employees) that provides them with more flexibility on payments and interest but attaches more restrictions and the Fed also has authority to set up a Main Street Lending Program to lend to small and midsized businesses. (A deeper dive into these two programs is beyond the scope of this article). The LSTA will continue to closely follow and report on the CARE Act as things develop.