CARES Act: Implications for PE-Sponsored Portfolio Companies

31 March 2020
View Debevoise In Depth

Click here to read additional updates in the Debevoise Coronavirus Resource Center.

Key takeaways:
  • The CARES Act, which was signed into law on March 27, 2020, authorizes the federal government to make an extraordinary amount of funding broadly available to businesses struggling with the impacts of COVID-19. This alert outlines what private equity sponsors and their U.S. portfolio companies need to know about two major sources of this funding—$500 billion in emergency liquidity support for distressed industries by the U.S. Treasury and the Federal Reserve Bank, and a $349 billion “paycheck protection program” established under the Small Business Act.
  • While the CARES Act specifies tenor and interest rates for certain types of loans under the Treasury and FRB programs, these and other basic economic terms are otherwise left largely to the discretion of the Secretary of the Treasury. Crucially, for borrowers with outstanding leveraged loans or high yield bonds, the extent to which CARES Act financing will need to be secured (and by what assets) is not clear; nor is there any indication where the government might require these loans to sit in a borrower’s corporate structure (e.g., whether they can be structurally subordinated at a holding company outside the existing credit group).
  • What is clear is that Treasury and FRB program financing will come with significant strings attached, including limitations on stock buybacks and dividends, employee compensation and workforce reduction, among others.
  • The “paycheck protection program” will be available to some businesses that would not otherwise have qualified for SBA loans. However, with limited exceptions for certain types of businesses (e.g., hotels and restaurants), the CARES Act does not explicitly waive the SBA’s normal affiliation rules (which tend to aggregate all of a private equity sponsor’s portfolio companies for purposes of determining eligibility based on size). For that reason, these loans may not be available to most sponsored companies.

Additional resources related to the Federal lending programs can be found below: