The SBA’s Paycheck Protection Program, a $349 billion loan guaranty program established by the CARES Act to provide deferrable, forgivable loans up to $10 million to small business owners addressed in more detail in prior Mayer Brown posts regarding the statutory provisions and the SBA’s Interim Final Rule, launched April 3, 2020. In the initial days after the program launch, hundreds of thousands of applications were submitted, but borrowers and lenders alike continued to have questions about key aspects of the program.

On April 6, 2020, the SBA clarified certain issues in new Continue Reading SBA Issues New Official FAQs for the Paycheck Protection Program (PPP) Addressing Borrower Eligibility, Affiliation, Underwriting, and Updates to Previously Submitted Applications

As discussed in a previous post, Section 4003 of the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, authorizes $500 billion of liquidity to support businesses, states and municipalities “related to losses incurred as a result of coronavirus.”  It can be expected that a portion of the liquidity authorized by Section 4003 of the CARES Act will take the form of loans to companies that are borrowers under loans held by collateralized loan obligation vehicles (“CLOs”).  This, in turn, could ease the impact of the COVID-19 crisis on CLOs, possibly also leading to renewed CLO formation, which plays an important role in the U.S. economy by providing a source of stable funding to U.S. businesses.  In this Legal Update we focus on highlighting certain notable features of Section 4003 (as well as related parts of Title IV) of the CARES Act in respect of CLOs.

The Small Business Administration (SBA) released an interim final rule the evening of April 2 outlining key provisions of the SBA’s Paycheck Protection Program (PPP) and the provisions of the CARES Act relating to loan forgiveness. The rule is effective immediately.

Some highlights of the rule include:

Increase in interest rate. The interest rate on any PPP loan will be Continue Reading SBA Releases Guidance on PPP Small Business Loans

In a development with potential relevance for leveraged borrowers and, by extension, the CLO market, the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, was signed into law by President Trump on March 27, 2020. The CARES Act provides for liquidity support for both large and mid-size businesses that, unlike the Primary Market Corporate Credit Facility and the Secondary Market Corporate Credit Facility, is not limited to investment grade businesses or investment grade debt.  In this Legal Update, we make a few initial observations regarding eligibility, terms, requirements and conditions for the programs and facilities contemplated by Section 4003 of the CARES Act, followed by a detailed summary of Sections 4003 and 4004 of the CARES Act.

On March 31, 2020, the U.S. Department of the Treasury issued guidance on the Payroll Protection Program (PPP) under the CARES Act.  The PPP provides small business with funds to pay payroll costs, including employee benefits.  The funds can also be used to pay interest on mortgages, rent and utilities.  The specific guidance issued included the borrower loan application form and fact sheets providing information to borrowers on completing the loan application as well as how the loans will work.

Consistent with the description of the PPP in the CARES Act, the guidance specifically states that the loans will be fully forgiven when used for payroll costs, interest on mortgages, rent and utilities, but noted that due to likely high subscription rates “it is anticipated that not more than twenty-five percent (25%) of the forgiven amount may be for non-payroll costs”.  It is also noteworthy that unlike other SBA products, PPP loans will not be negotiated and all loans will be on the same terms.  Interest rates are set at 0.5%, which is well below the 4% statutory limit set forth in the CARES Act.   The term of each loan will be 2 years (subject to a deferral period), which is also below the 10-year limit specified in the CARES Act.  Finally, the deferral period will be 6 months whereas the minimum statutory length under the CARES Act could have gone up to 12 months.  There also appears to be immediate approval (without any approval process) for insured banks, credit unions, and Farm Credit System institutions to participate as lenders.  The specifics regarding guidance on “additional lenders” under the PPP are still to come.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law. Among other things, the CARES Act creates the “Paycheck Protection Program” (PPP), which provides up to $349 billion to expand the Small Business Administration’s (SBA’s) existing 7(a) loan program to support new loan guarantees and subsidies. The terms of the PPP are described in more detail here.

The CARES Act allows the SBA and the Secretary of the Treasury to authorize additional lenders to make paycheck protection loans if they determine such additional lenders have the necessary qualifications to process, close, disburse and service loans made with the guaranty of the SBA. Details regarding the application process are expected to be provided in the next week. Treasury Secretary Steven Mnuchin publicly stated in an interview with Fox News yesterday that he “expects to have a program up on Friday.”

Continue Reading Potential for Fintech Lenders and other “Additional Lenders” to enter the SBA Market: What Lenders Need to Know

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law.

Among other things, the CARES Act creates the “Paycheck Protection Program,” which provides up to $349 billion to expand the Small Business Administration’s (SBA’s) existing 7(a) loan program to support new loan guarantees and subsidies. Highlights of the program include: Continue Reading Small Business Loans under the CARES Act

On Monday, March 23, 2020, in response to the evolving economic crisis created by the COVID-19 epidemic, U.S. Treasury and the Federal Reserve authorized the establishment of two new facilities to support credit for large employers:

  • The Primary Market Corporate Credit Facility (PMCCF) will provide credit for new bond and loan issuance by directly purchasing eligible corporate bonds from investment grade issuers.
  • The Secondary Market Corporate Credit Facility (SMCCF) will provide liquidity for outstanding corporate bonds and eligible exchange-traded funds (ETFs) by buying corporate bonds and ETFs in the secondary market.

The Federal Reserve will use authority granted by Section 13(3) of the Federal Reserve Act to lend to the SPV to support the vehicle’s purchases. The programs were approved by the U.S. Treasury in initial amounts of $10 billion, with funds provided from Treasury’s Exchange Stabilization Fund (ESF). SMCCF and PMCCF were not used during the 2008 financial crisis.

Continue Reading US Treasury and Federal Reserve Announce Two New Corporate Credit Facilities for Large Employers

The disruptions in economic conditions caused by the coronavirus disease 2019 (COVID-19) are reaching the commercial paper and longer term debt capital  markets.  The Board of Governors of the Federal Reserve System (Federal Reserve) has already set into motion three separate facilities as part of its effort to facilitate credit and help alleviate collateral volatility that are expressly available to different participants in such.  On March 17, 2020,  the Federal Reserve reestablished a dealer credit facility last operated during the 2008 credit crisis. The Primary Dealer Credit Facility (“PDCF2020”) is a loan facility that provides credit to primary dealers, secured by certain highly rated fixed income collateral.  The Commercial Paper Funding Facility also was reintroduced on March 17, 2020 (“CPFF2020”).

CPFF2020 mirrors the commercial paper funding facility commenced by the Federal Reserve in 2008 and is available to eligible ABCP issuers that apply for it and pay a facility fee.  Issuers participating in the CPFF2020 will have direct access to the Federal Reserve for backstop purchases of their ABCP at predetermined rates irrespective of then current market conditions.  On March 18, 2020, the Federal Reserve established a separate facility (the Money Market Mutual Fund Liquidity Facility, or “MMLF”) that is designed to provide liquidity to certain types of money market mutual funds (“MMFs”).  MMLF is intended to support prime, state and municipal MMFs that experience significant stress in the event that investors seek to redeem their MMF shares for cash.  MMLF provides for the Federal Reserve to make loans to eligible financial institutions that purchase certain eligible assets from MMFs.

To contain the coronavirus and save lives, the government has required many people to stay home and not report to work.  To help those people manage their financial obligations, the government is also mandating different types of payment forbearance relief.  That relief resembles a stay or moratorium on enforcement and is increasingly pervasive and generally unprecedented.

These actions by definition cause a decrease in the cash flow and value of these financial obligations in the hands of the holder regardless of whether the holder is an originator, financial intermediary, a fund or REIT or securitization issuer.

As a result, many non-bank holders are already experiencing extreme liquidity stress.  Holders subject to mark-to-market accounting and holders that finance their financial assets on repo or mark-to-market borrowing base facilities are forced to post additional collateral and take capital charges.  Securitized and other bonds collateralized by these financial obligations are subject to possible downgrade, causing rating sensitive holders like insurance company and bank holders to sell them.  Many of these investors will face the choice of meeting margin calls and forced sale.  The utility of government programs like TALF could be undercut if rating agencies are unable to assign “AAA”-ratings to bonds backed by consumer obligations upon which forbearance has been mandated.

For these holders of financial assets, the sizeable government relief to date has largely come out of the financial crisis playbook (with some new twists).  It generally consists of a well-intentioned patchwork of large, backstop financing facilities that provide some liquidity and an implied valuation floor for the financial assets eligible for financing there.  For holders of financial assets fortunate enough to to be eligible, this relief could be a lifesaver.   However, many non-bank holders will not be eligible for these programs.  These relief programs in many cases won’t prevent a downgrade of corporate or securitized bond obligations.

The financial crisis was largely created by market phenomena like the credit cycle. Government relief programs extended to the markets ultimately allowed the markets to function and recover from the crisis.  This time, the crisis is not triggered by markets, but by a virus and consequent government policy decision to protect lives.  The immediate effect of that policy decision resulted in blanket payment stays and forbearance relief for affected consumers.  The scope of that forbearance relief will probably expand significantly if the substance of current bills in Congress is ultimately enacted.  Yet the “market support” approach adapted from financial crisis isn’t tailored to provide relief to a market holding financial assets on which obligors have been granted the blanket forbearance relief.

We may soon find that a different governmental response is necessary that is less reliant on supplanting market forces and that more directly addresses the effect of blanket consumer forbearance.  That response could entail relief that mirrors the “stay” relief provided to the consumer.  One form of relief would consist of a temporary stay or moratorium on the enforcement of margin calls and foreclosure.  Relief of this sort would raise complex legal and policy issues.  Additional relief addressing the effects of ratings downgrades and additional directives easing the effect of mark to market accounting may also be required.  As the crisis subsides, this relief would expire following the expiration of the consumer relief.