Coronavirus Economic Stabilization Act of 2020 (CESA) and considerations for private equity portfolio companies

On March 27, 2020, the United States Congress passed the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) to respond to the medical and economic impact of the COVID-19 pandemic. Included in the CARES Act is the Coronavirus Economic Stabilization Act of 2020 (CESA), which authorizes the making of emergency loans and guarantees to, and investments in, U.S. businesses in certain sectors that have experienced losses as a result of COVID-19 and authorizes financial support for the U.S. Federal Reserve’s efforts to provide liquidity to the financial system.

What you need to know

  • CESA authorizes $46B for loans and loan guarantees for qualifying passenger and cargo airlines, ticket agents, airline repair and maintenance businesses and other businesses critical to maintaining national security.
  • CESA also authorizes $454B to support programs established by the U.S. Federal Reserve to provide liquidity to the financial system, including a proposed program to support direct loans to U.S. businesses with 500-10,000 employees. However, the Federal Reserve has yet to establish this mid-sized business program, and accordingly many details regarding its implementation will remain unknown until the Fed has done so.
  • CESA programs are generally limited to U.S. businesses with a majority of their employees based in the U.S., but do not preclude participation by U.S. subsidiaries of non-U.S. parent entities.
  • Recipients of financial support under CESA programs must agree to financial and operational restrictions, including limiting dividends and share buybacks, caps on executive compensation, maintaining certain workforce and compensation levels, retaining U.S. jobs onshore and remaining neutral in union drives. In some cases, these restrictions continue to apply for 12 months or longer after the loan or investment is repaid.
  • Private equity-backed applicants should be aware of these restrictions when considering applying for CESA financing.

Eligible recipients of funding under CESA

CESA authorizes the Secretary of the U.S. Department of the Treasury (the Secretary), until December 31, 2020, to make up to $500B of loans, guarantees and other investments in support of eligible businesses, States and municipalities that do not, in the aggregate, exceed $500B. Specifically, CESA authorizes the Treasury Department to issue:

  • up to $46B in loans and loan guarantees for passenger and cargo airlines, ticket agents, airline repair and maintenance businesses and other businesses critical to maintaining national security; and
  • up to $454B (plus any unused allocation of the other $46B) in loans and loan guarantees to and other investments in programs or facilities established by the Federal Reserve to provide liquidity to the financial system by purchasing debt securities, debt obligations or other interests (whether directly from issuers or in secondary market transactions) and for making loans, including loans or other advances secured by collateral.

Within the allocation to support Federal Reserve programs, CESA directs the Secretary to seek the implementation by the Federal Reserve of a “mid-sized business” program or facility under which financing is provided to banks and other lenders that provide “direct loans”1 to eligible businesses and nonprofits with between 500 and 10,000 employees. The loans under any mid-sized business direct loan program would carry an annualized interest rate that is not higher than 2 percent per annum, with no principal or interest due or payable for the first 6 months of the loan or such longer period as the Secretary determines. CESA further provides for both eligibility criteria and terms and conditions as described in more detail below.

In response to the COVID-19 pandemic, the Federal Reserve has already established numerous programs for providing liquidity to capital markets through purchases of Treasuries and mortgage-backed securities and financing of the purchase of corporate bonds, mortgage-backed and asset-backed securities, commercial paper and other types of debt.2 The Federal Reserve has announced that it will establish other new programs designed to support the flow of credit to employers, consumers and businesses, including a “Main Street” business lending program. However, the Federal Reserve has not yet established a mid-sized business program of the type contemplated by CESA.

Any Federal Reserve-established program under which the Secretary makes a loan or other investment or provides a loan guarantee under CESA may only finance or invest in debt or equity of businesses created or organized in the U.S. or under U.S. laws and that have significant operations in and a majority of their employees based in the U.S.

General requirements under CESA

The following requirements will apply to recipients of loans or loan guarantees under the programs for airlines, airline-related businesses and national security related businesses and to borrowers under any direct loan program (whether or not for mid-sized businesses) established by the Federal Reserve that is eligible for support under CESA, unless, in the case of borrowers under Federal Reserve programs, such requirements are waived by the Secretary in the Secretary’s discretion.

  • Restriction on dividends and share repurchases: each recipient must agree, until the date that is 12 months after a direct loan is no longer outstanding, not to (1) pay dividends or make other capital distributions with respect to the common stock or (2) repurchase any of its or its parent company’s equity securities listed on a national securities exchange, except as required under a contractual obligation outstanding as of the enactment of the CARES Act. Affiliates of any airline, airline-related business or business critical to national security receiving a CESA loan are also subject to the restrictions on purchasing equity securities.
  • Limitations on employee compensation: Until 1 year after a loan, guarantee or other investment is no longer outstanding (and, in the case of air carriers and contractors, until March 24, 2022):
    • no officer or employee of a recipient whose total 2019 compensation exceeded $425,000 (excluding employees covered by collective bargaining agreements) may receive (1) total compensation for any 12-month period exceeding their total 2019 compensation or (2) termination benefits worth more than two times their total 2019 compensation; and
    • no officer or employee of a recipient whose total 2019 compensation exceeded $3M may receive total compensation for any 12-month period exceeding the sum of $3M and 50% of the amount by which their total 2019 compensation exceeded $3M.

Additional requirements for borrowers under mid-sized business facilities under CESA

In addition to the foregoing requirements, CESA prescribes the following additional certifications for the proposed direct loan program for midsized businesses.3 The inclusion of these certifications will be subject to the discretion of the Federal Reserve Board of Governors in the case of its Main Street Lending Program or any other similar Federal Reserve program or facility that supports lending to small and mid-sized businesses:

  • uncertain economic conditions make its loan necessary to support ongoing operations;
  • loan proceeds will be used to retain at least 90% of its workforce, at full compensation and benefits, until September 30, 2020;
  • it intends to restore at least 90% of its workforce that existed as of February 1, 2020, and all compensation and benefits to its workers, no later than 4 months after termination of the COVID-19 public health emergency;
  • it is not a debtor in a bankruptcy proceeding;
  • it is an entity or business domiciled in the U.S. with significant operations and employees located in the U.S.;
  • it is created or organized in the U.S. or under the laws of the U.S. and has significant operations in and a majority of its employees based in the U.S.;
  • until 2 years after loan repayment, it will not outsource or offshore jobs or abrogate existing collective bargaining agreements; and
  • it will remain neutral in any union organizing effort for the term of the loan.

Additional requirements for airlines, airline-related businesses and critical national security businesses

The following additional requirements apply to airlines, airline-related businesses and critical national security businesses receiving loans or loan guarantees under CESA:

  • the applicant is an eligible business for which credit is not reasonably available and the intended obligation of the business is prudently incurred;
  • the loan or loan guarantee is sufficiently secured or the interest rate reflects the risk incurred and, to the extent practicable, is not less than interest rates prevalent prior to the outbreak of COVID-19;
  • the duration of the loan or loan guarantee is not more than 5 years;
  • until September 30, 2020, the applicant agrees to maintain its employment levels as of March 24, 2020, to the extent practicable, and not to reduce its workforce by more than 10% from such levels;
  • the applicant is created or organized in or under the laws of the U.S. and has significant operations in and a majority of its employees based in the U.S.; and
  • coronavirus-related losses jeopardize the continued operations of the business.

In addition, the Secretary must receive a warrant or equity interest in any publicly traded eligible business (unless the Secretary determines that warrants or equity interests cannot be feasibly issued, in which case the Secretary may receive a senior debt instrument), or a warrant, equity interest or senior debt instrument in any non-publicly traded eligible business, which in each case provide reasonable participation in equity appreciation or a reasonable interest rate premium. Such instruments will have full transfer and exercise rights, but the Secretary may not exercise any voting rights.4

Subject to the foregoing, the Secretary has broad authority to set terms and conditions, including interest rates, for loans, guarantees and investments under these programs.

The Secretary is directed under CESA to publish additional procedures and requirements for these recipients by April 6.


No entity in which the President, Vice President, any head of an Executive department or any member of Congress holds (individually or together with their respective spouses, children or children in law) an interest of 20% or more by vote or by value is eligible for any economic support under CESA.

Implementation and oversight of CESA

The Secretary is granted up to $100M (out of the total funds authorized) and broad authority to carry out his authority under CESA, including express authorization to hire employees, enter into contracts, establish investment vehicles, issue regulations and guidance and engage financial institutions as depositories, brokers, dealers and financial agents for the United States.

CESA provides for extensive reporting and disclosure requirements, including requirements to describe CESA transactions on the Treasury Department’s website and to regularly submit reports to and testify before Congressional committees. CESA also establishes a bi-partisan Congressional Oversight Commission, which will oversee its implementation by the Treasury Department and the Federal Reserve, and an Office of the Special Inspector General for Pandemic Recovery, which will have $25M in funding and a 5-year mandate to conduct audits and investigations of CESA transactions.


1 The CARES Act defines a “direct loan” as a loan under a bilateral loan agreement that is (1) entered into directly with an eligible business as borrower and (2) 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.

2 On March 23, 2020, the Federal Reserve authorized various programs similar to those authorized in the 2008 financial crisis under the Emergency Economic Stabilization Act of 2008. These include (1) facilities to purchase at least $500B of Treasury securities and at least $200B of mortgage backed securities, (2) the establishment of “new programs” to support the flow of credit to employers, consumers, and businesses that, taken together, will provide up to $300B in new financing and that will be backed by $30B in equity financing from the Treasury Department, and (3) facilities to finance the purchase of newly issued bonds (the Primary Corporate Credit Facility), corporate bonds on the secondary market (the Secondary Market Corporate Credit Facility), asset-backed securities (the Term Asset-Backed Securities Loan Facility), municipal debt and bank certificates of deposit (the Money Market Mutual Fund Liquidity Facility), and commercial paper (the Commercial Paper Funding Facility). See

3 Note that the certification requirements for mid-sized businesses regarding dividends and share repurchases applies only to the period in which the loan is outstanding. §4003(c)((3)(D)(VII). However, another provision of CESA provides that for all direct loan programs, such restrictions apply until 12 months after the loan is outstanding. §4003(c)((3)(A)(ii).

4 Any air carrier receiving funds under CESA may be required to maintain such scheduled air transportation service as the Secretary of Transportation deems necessary to ensure services to any point served by that carrier before March 1, 2020, taking into account the air transportation needs of small and remote communities and the need to maintain well-functioning health care and pharmaceutical supply chains, including for medical devices and supplies.

Read all our coronavirus-related updates on our COVID-19 guidance for organizations resource page.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

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