Authored by Joe Bailey, Andy Smetana

On March 27, 2020, the House of Representatives passed and President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), an approximately $2 trillion relief measure to address the COVID-19 outbreak and economic fallout. The portion of the CARES Act referred to as the Coronavirus Economic Stabilization Act of 2020 (CESA) provides $500 billion to the Department of the Treasury’s (Treasury) Exchange Stabilization Fund for emergency relief to distressed industries. This includes relief for certain specified industries, such as air carriers, as well as a loan program for mid-size businesses with 500-10,000 employees (the Mid-Size Business Loan Program). The loan programs authorized under the CESA are separate from the Paycheck Protection Loans (PPP Loans) for smaller businesses and the Economic Industry Disaster Loans (EIDLs) described in a separate Perkins Coie LLP blog found here.

The loan programs established through the CESA offer a meaningful way for larger businesses impacted by COVID-19 to continue operations. Specifically, companies that exceed the 500-employee limit for PPP Loans (either directly, or as a result of being part of a control group employing more than 500 individuals), or that require more than $10 million in financial assistance (PPP Loans are capped at $10 million), may find the Mid-Size Business Loan Program to be a critical part of their strategy in navigating the current economic challenges. However, there are key differences between CESA loans and the other forms of economic relief made available under the CARES Act.

The following summarizes some of the key terms of the loan programs under Section 4003 of the CARES Act, and a table comparing these loan programs and the PPP Loans and EIDLs is provided here.


  1. What is the Mid-Size Business Loan Program?

This program is a form of emergency relief and taxpayer protection under the supervision of the Treasury, to be facilitated through the Federal Reserve’s lending facilities. The law requires the Treasury to endeavor to seek the implementation of a program or facility with the Federal Reserve that is intended to provide liquidity to the financial system that supports lending to eligible businesses, states, and municipalities. These goals are to be accomplished through direct loans to borrowers, by purchasing obligations or interest in secondary markets or elsewhere, and by purchasing obligations or other interests directly from other lenders. Of the $500 billion authorized under the CESA, $454 billion plus amounts that are unused under the industry-specific loan programs described below are to be made available through the Mid-Size Business Loan Program or to states and municipalities. The Treasury may also provide loan guarantees or other investments under this program.

  1. Who is eligible under the Mid-Size Business Loan Program?

The CESA defines “eligible business” to include air carriers (as defined in 49 U.S.C. 40102) and any other U.S. business that has not otherwise received adequate economic relief in the form of loans or loan guarantees provided under the CARES Act. The Mid-Size Business Loan Program is intended for businesses, including nonprofit organizations to the extent practicable, with between 500 and 10,000 employees.

As part of the loan process, any applicant must certify (i) that the uncertainty of economic conditions as of the date of the loan application makes it necessary for the loan request to support the business’ ongoing operations, and (ii) that the company is not a debtor in a bankruptcy proceeding. The borrower must also be an entity or business domiciled and created or organized in the U.S., with significant operations and a majority of its employees located in the U.S.

  1. What are the anticipated loan terms under the Mid-Size Business Loan Program?

For this program, the CESA specifies that direct loans from the Federal Reserve will be provided with an annualized interest rate of no higher than 2% per annum, with no principal or interest becoming due within the first 6 months after the loan is made. Loans originated by other lenders and sold to the Federal Reserve may have differing terms, subject to any applicable regulations established by the Treasury or the Federal Reserve.

There is no express statutory limit on the manner in which these loan proceeds may be used (but see limitations on business activities in question 4 below), and there is no express limit on the amount that may be borrowed by a particular borrower.

Unlike PPP Loans, which provide for forgiveness of amounts used for payroll costs in the 8-week period after the loan is made, loans made under the Mid-Size Business Loan Program are not forgivable.

The CESA does not specify whether personal guarantees or collateral will be required for loans under the Mid-Size Business Loan Program. Provisions in the CESA that require industry-specific loans to be secured do not expressly apply to loans under the Mid-Size Business Loan Program. Instead, collateral requirements will likely be determined by the Federal Reserve pursuant to Section 13(3) of the Federal Reserve Act.

  1. Will loans under the Mid-Size Business Loan Program impose limitations on the borrower’s business activities?

Yes. Any company that obtains a loan under this program will be required to provide a good faith certification as to the following:

    • the loan proceeds must be used to retain at least 90% of the company’s workforce, at full compensation and benefits, until September 30, 2020;
    • they intend to restore not less than 90% of their workforce that existed as of February 1, 2020, and to restore all compensation and benefits to its workers no later than 4 months after the termination date of the COVID-19 public health emergency;
    • the borrower may not pay dividends with respect to common stock or repurchase listed equity securities (including securities issued by the borrower’s parent) while the loan is outstanding, except to the extent required under a contractual obligation in existence as of March 27, 2020;
    • the borrower must not outsource or offshore jobs for the term of the loan and for 2 years after completing repayment of the loan;
    • the borrower must not abrogate existing collective bargaining agreements for the term of the loan and 2 years after completing repayment of the loan; and
    • the borrower must remain neutral in any union organizing effort for the term of the loan.

For direct loans, in addition to providing such good faith certification, the borrower must contractually agree to the restrictions on dividends, distributions, and buy-backs referenced above. The CESA defines a “direct loan” as a loan under a bilateral loan agreement that is (i) entered into directly with an eligible business as borrower, and (ii) not part of a syndicated loan, a loan originated by a financial institution in the ordinary course of business, or a securities or capital markets transaction.

In addition to the foregoing, certain compensation limits will apply to Mid-Size Business Loan Program loans that are made in the form of direct loans. Presumably these compensation limits would not apply to loans that are not characterized as “direct loans”; however, further regulatory guidance will be needed to clarify this point.

Specifically, Section 4004 of the CARES Act limits a borrower’s ability to compensate certain highly compensated officers and employees by imposing the following caps on “total compensation” (including salary, bonuses, stock, and other financial benefits provided to the officer or employee) and severance for officers or employees whose total compensation exceeded $425,000 in 2019, or $3 million in 2019:

    • officers and employees compensated in amounts over $425,000, but less than $3 million, in 2019 would have their compensation capped at the total compensation level they received in 2019; and
    • officers and employees compensated over $3 million in 2019 would have their compensation capped at the sum of (i) $3 million plus (ii) 50% of the amount received by the officer or employee in 2019 that was in excess of $3 million (e.g., an officer who received total compensation of $4 million in 2019 would have a cap of $3.5 million for 2020).

To the extent applicable, these compensation limits remain in place for the period from the loan date through one year after the loan is repaid.