April 16, 2020 | Covid-19 | Posted by Bob Greene, Senior HR Industry Analyst at Ascentis
More Coronavirus Financial Help Is on The Way: The Federal Reserve Takes Action
On April 9, 2020, the United States Federal Reserve Board took action to pour an additional $2.3 trillion in financial aid into the US economy, specifically targeted to the needs of institutions which may have been overlooked in the previously passed CARES Act. Recipients include businesses too large to take advantage of the terms of the Paycheck Protection Program (PPP), individual taxpayers and state and local government entities.
The most important provision impacting employers within the voluminous April 9 Federal Reserve Announcement is the establishment of a new “Main Street New Loan Facility” (MSELF) program, funded up to $600 billion – this was on top of the $2.2 trillion already committed to fund CARES Act programs.
What do employers need to know about the details of this new borrowing program?
First and foremost, while PPP loans have a potential to be 100% forgiven (effectively turning them into grants), the amounts borrowed under the new MSELF program must be repaid and cannot be forgiven. While the upper limit of employees for company eligibility for the new MSELF program is 10,000 (vs. 500 for most employers under the PPP), it should be noted that employers, if eligible for both programs, may apply for both programs. The authority to lend under the MSELF program expires on September 30, 2020, or when funds run out, if sooner.
To be more specific about eligibility for borrowers under the Main Street New Loan Facility, the test is two-pronged:
- 10,000 or fewer employees, OR
- $2.5 billion in 2019 annual revenues
Additionally, borrowers “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.”
Loans originated under the Main Street New Loan Facility will have the following attributes:
- A term of 4 years,
- Deferred interest and principal for one year,
- Adjustable interest rate of the FRB’s Secured Overnight Financing Rate (“SOFR”; currently 0.02%) plus 250 - 400 basis points, so as of this writing, 2.52% - 4.02%,
- Minimum loan of $1 million,
- Maximum loan of (i.) $25 million, or (ii.) an amount not exceeding 4 times the borrower’s 2019 EBITDA, when added to any existing committed but undrawn debt,
- Prepayment carries no penalty.
- That it requires financing due to the exigent circumstances presented by the Coronavirus disease 2019 (“COVID-19”) pandemic,
- That it will make reasonable efforts to maintain its payroll and retain its employees during the term of the loan,
- That it will not use the proceeds of the loan to cancel or reduce any existing loans or lines of credit,
- That it meets the EBITDA leverage conditions stated above regarding the maximum loan eligibility,
- That it will follow compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act.
That last condition is key, and requires employers to commit to three key provisions referenced in the CARES Act, which can be summarized as:
- for the term of the loan plus 12 months thereafter, no “stock buybacks” (as defined in the Act),
- for the term of the loan plus 12 months thereafter, no common stock dividends or other capital distributions, and
- for the term of the loan, the employer will abide by the compensation limit provisions of §4004 of the CARES Act.
Section 4004 of the CARES Act should be carefully reviewed by any employer considering applying for this new loan facility, and which has one or more employees who earned in excess of $425,000 in calendar year 2019. The compensation change limits in the CARES Act are two-fold. For the period that any loan under the Act is outstanding, plus one year thereafter:
- No officer or employee whose total compensation exceeded $425,000 in calendar year 2019 will receive from the employer-borrower:
- For any consecutive 12-month period, the total compensation received by the officer or employee during calendar year 2019, OR
- Severance pay and/or benefits upon termination in excess of two times the total compensation received by the officer or employee during calendar year 2019,
- No officer or employee whose total compensation exceeded $3,000,000 in calendar year 2019 will receive from the employer-borrower, for any consecutive 12-month period, an amount exceeding the sum of:
- $3,000,000 PLUS
- 50% of the excess over $3,000,000 of the total compensation received in calendar year 2019. (Examples: Officer A received $3 million in total compensation in 2019; their compensation limit for
the first year of the loan will be $3 million. Officer B received $5 million in total compensation in 2019; their compensation limit for the first year of the loan will be $4 million.)
The PPP and the Main Street New Loan Facility share many features, including highly favorable loan terms and a public/private partnership infrastructure (government agency and private banks) to facilitate the granting and servicing of the loans which result from these programs. In other ways they differ considerably, including the fundamental fact that PPP loans are forgivable and Main Street Loans are not.
From an HCM perspective, loans originated under the PPP are significantly more complex to support, with detailed payroll basis calculations to determine the loan limit, ongoing detailed expense recordkeeping to substantiate forgiveness amounts, and employee retention and compensation maintenance requirements over the 8-week course of the loan to preserve forgiveness provisions.
When compared to these PPP loan requirements, loans originated under the Main Street provisions have only compensation limits, and those are applicable only to employees who were compensated $425,000 or more in calendar year 2019.
Bob Greene currently serves as Senior HR Industry Analyst at Ascentis. Bob’s 40 years in the human capital management industry have been spent in practitioner, consultant and vendor/partner roles. As practitioner, he managed payroll for a 5,000-person bank in New Jersey. As consultant, he spent 8 years advising customers in HRMS, and payroll and benefits system design as well as acquisition strategies. Bob also built a strategic HCM advisory practice for Xcelicor (later acquired by Deloitte Consulting.)