On April 9, 2020, the Treasury and the Federal Reserve Board (Federal Reserve) released new details regarding the Main Street Lending Program, as well as several other financial relief programs, focused on providing liquidity to small and mid-sized businesses to address the economic challenges resulting from the coronavirus pandemic (COVID-19). The programs announced by the Federal Reserve are part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which was signed into law on March 27, 2020, and are expected to provide up to $2.3 trillion in financing to eligible businesses.
The Main Street Lending Program is highly anticipated and is primarily aimed at companies that are too large to participate in the Paycheck Protection Program (including, private equity and venture capital backed businesses). It includes approximately $600 billion in funding and includes financing for the Main Street New Loan Facility (MSNLF) and the Main Street Expanded Loan Facility (MSELF). The MSNLF allows lenders to originate new loans to eligible borrowers and the MSELF allows lenders to increase the size of existing loans to eligible borrowers. Borrowers may participate in either the MSNLF or the MSELF program, but not both.
While additional details regarding the Main Street Lending Program are expected to be released in the coming days and weeks, this Client Alert summarizes the terms of the Main Street Lending Program as published by the Federal Reserve on April 9.
Who is eligible to borrow?
A business is eligible if:
- it has fewer than 10,000 employees or less than $2.5 billion in 2019 annual revenues; and
- it was 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.
There is currently no requirement that certain affiliates be included when determining the size limits (as opposed to the Paycheck Protection Program), or any prohibition against a U.S. subsidiary of a foreign-owned company if it meets the applicable requirements.
While the CARES Act included a requirement that borrowers under the Main Street Loan Programs have at least 500 employees, the Federal Reserve’s recent guidelines do not. We anticipate additional details to be forthcoming.
Who is providing loans?
Any U.S. insured depository institution, U.S. bank holding company, and U.S. savings and loan holding company is eligible to provide a loan.
What is the loan size?
Under the MSNLF, loans are for a minimum of $1 million and a maximum of the lesser of (1) $25 million, and (2) an amount that, when combined with borrower’s existing outstanding and committed, but undrawn debt, does not exceed 4x the borrower’s 2019 EBITDA.
Under the MSELF, loans are for a minimum of $1 million and a maximum of the lesser of (1) $150 million; (2) 30% of the borrower’s existing outstanding and committed but undrawn debt; and (3) an amount that, combined with borrower’s existing outstanding and committed, but undrawn debt, does not exceed 6x the borrower’s 2019 EBITDA.
What are the other basic terms?
MSNLF loans must be unsecured and originated on or after April 8, 2020.
For the MSELF program, if the original loan is secured, the MSELF loan will also be secured on a pari passu basis with the original loan. If the original loan is unsecured, the MSELF loan will also be unsecured.
Under both Main Street Loan Programs, loans will have the following features:
- Maturity Date: 4 years after origination;
- Interest rate: Adjustable rate of Secured Overnight Financing Rate plus 2.50% to 4.00%;
- Deferred Payments: Principal and interest will be deferred for 1 year;
- Prepayment: Permitted without penalty; and
- Fees: (1) Borrowers shall pay to the lender an origination fee equal to 1% of the principal amount, (2) lenders are required to pay to the Federal Reserve a participation fee for any new loans made (not upsized loans under MSELF) equal to 1% of the principal amount purchased by the Federal Reserve under this program, which participation fee may be passed through to the borrower, and (3) the Federal Reserve shall pay to a participating lender a loan servicing fee equal to 25 basis points of the principal amount of the loan purchased as consideration for the lender servicing the loan.
In addition, these loans are not eligible for loan forgiveness.
What restrictions apply to ongoing operations if a business takes a Main Street Loan Program loan?
Borrower must make a good faith certification that, among other things, it:
- shall make “reasonable efforts” to maintain payroll and retain employees during the term of the loan (we note that the CARES Act stated that the funds received must be used to retain at least 90% of the recipient’s workforce, at full compensation and benefits, until September 30, 2020, while this Federal Reserve guidance does not contain any of those details);
- requires this financing due to the exigent circumstances presented by the COVID-19 pandemic;
- shall not use funds to repay or refinance pre-existing loans or lines of credit, or to repay or reduce other loan balances or junior debt obligations (with the exception of mandatory principal payments);
- shall not seek to cancel or reduce any existing outstanding lines of credit with lenders;
- shall not during the life of the loan, plus one year, pay dividends or other distributions to its equity holders or repurchase equity securities listed on a national stock exchange of the borrower or its parent company; and
- shall not during the life of the loan, plus one year, pay any officer or employee whose total compensation in 2019 exceeded $425,000 (1) compensation for a consecutive 12-month period that exceeds 2019 total compensation paid to that person; or (2) severance pay or other benefits on termination of employment that exceed 2x the 2019 total compensation paid to that person; shall not pay any officer or employee whose total compensation in 2019 exceeded $3 million more than $3 million plus 50% of the amount by which such person’s total compensation exceeded $3 million in 2019.
We note that there are several certifications required by the CARES Act that were not mentioned in the Federal Reserve guidance, but which we expect will be required, including the borrower certifying that it:
- is not a debtor in a bankruptcy proceeding;
- shall not during the life of the loan, plus two years, outsource or offshore jobs;
- shall not during the life of the loan, plus two years, abrogate existing collective bargaining agreements; and
- will remain neutral in any union organizing effort for the term of the loan.
What issues should a borrower consider with respect to its existing indebtedness?
Any potential applicant under the Main Street Lending Program must review its existing debt documents to confirm if any amendments or waivers are necessary to permit the issuance of new debt under the Main Street Lending Program. Further, the program prohibits a borrower from paying indebtedness that is equal to or lower in priority to the Main Street loans, which, as currently drafted, will require existing lenders of borrowers who receive a Main Street loan to agree to such payment subordination. Additional guidance is needed to clarify the repayment waterfall and priorities.
Main Street Loan Programs and the PPP
Some businesses that may be ineligible for Paycheck Protection Program (PPP) loans, may find that these new relief programs provide some much-needed assistance. Even businesses that have applied for, or received, a PPP loan may still be eligible for these new programs. For more information on the PPP loans, please see our various client alerts on this topic:
- Overview of the CARES Act’s Paycheck Protection Loan Program from March 30, 2020
- Update: Overview of the CARES Act’s Paycheck Protection Loan Program; Guidance for Private Equity and Venture Capital-Backed Companies from April 02, 3030
- Latest Guidance on Paycheck Protection Loan Program Under the CARES Act from April 03, 2020
- April 7, 2020 – Further Update on Paycheck Protection Program (the “PPP”) under the CARES Act from April 07, 2020
- The Paycheck Protection Program in Action: Questions About Loan Application Risks from April 10, 2020
The Federal Reserve also announced the Paycheck Protection Program Liquidity Facility (PPPLF) to extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value. This is intended to extend liquidity to lenders so that additional PPP loans may be provided to borrowers.
We continue to closely monitor the federal government’s response to the ongoing challenges that businesses face in response to the COVID-19 pandemic and will provide additional updates as warranted.