April 10, 2020: Main Street Lending Program: New Federally-Backed Loans and Loan Expansions for Small and Medium-Sized Businesses
On April 9, the Federal Reserve announced details on the Main Street Lending Program (the “Program”), a new loan program authorized under the CARES Act to assist small and medium-sized businesses with financial needs due to the coronavirus/COVID-19 pandemic. Under the Program, eligible borrowers can receive new loans or loan expansions of $1 million or more by September 30, 2020. The Federal Reserve is making up to $600 billion available under the Program.
Small businesses may participate in the Program, provided they take out a loan or loan extension that meets the $1 million minimum loan size. Companies that received or applied for loans under the Paycheck Protection Program (“PPP”) are also eligible for loans under the Main Street Lending Program.
The Main Street Lending Program is still being finalized. The Federal Reserve is accepting comments on the program until Thursday, April 16. Interested borrowers and lenders are encouraged to submit comments here.
Eligible businesses are those with up to 10,000 employees or up to $2.5 billion in 2019 annual revenue that were “in good financial standing before the crisis”, that were created or organized under U.S. law, and that have a significant portion of their operations and a majority of their workforce based in the U.S. No criteria for determining a business’s good financial standing prior to the COVID-19 crisis are specified in the preliminary guidance on the Program.
Eligible borrowers may receive either a new loan or a loan expansion under the Program, but not both. Receipt of a PPP loan does not disqualify a business from the Program though.
To receive new or expanded loans under the Program, borrowers must also certify:
- that the loan or loan expansion will not be used to:
- repay or refinance pre-existing loans or lines of credit the borrower received from the same lender, which, for the expanded loan, applies to the amount of the loan prior to its expansion under the Program;
- repay other loan balances or repay debt of equal or lower priority before fully repaying the Program loan or loan expansion (except that the borrower may make mandatory principal payments on other loans);
- that they:
- will neither seek to nor actually cancel or reduce any other existing lines of credit;
- need financing due to the coronavirus pandemic;
- will use the new or expanded loan to maintain payroll and retain employees during the term of the loan or loan expansion (no specific standards on the required level of payroll or employee retention are included in the initial guidance)
- meet the EBITDA leverage requirements set by the Program (which are that, in combination with the borrower’s existing outstanding and committed but undrawn debt, a loan does not exceed 4x the borrower’s 2019 EBITDA and a loan extension does not exceed 6x the borrower’s 2019 EBITDA)
- will abide by the compensation, stock repurchase and capital distribution limits set by Section 4003(c)(3)(A)(ii) of the CARES Act, which include:
- not repurchasing the borrower’s stock or its parent’s stock or paying any dividends or capital distributions on its stock during the term of the loan and for 12 months after its full repayment; and
- capping total compensation of employees and officers who earned over $425,000 in 2019 but whose salaries were not set by collective bargaining agreement to their 2019 compensation amount or to twice that amount in severance; and
- capping total compensation of all employees and officers who earned over $3 million in 2019 to $3 million plus 50% of the amount by which their 2019 compensation exceeded $3 million.
- that no more than 20% of the borrower is directly or indirectly owned by the President, Vice President, the leader of a department of the Executive branch of the federal government, a Member of Congress, or the spouse, child, son-in-law or daughter-in-law of any of those individuals.
Loan Terms and Fees:
The following features apply to both new and expanded loans under the Program:
- 4-year loan maturity
- One year deferral of principal and amortization
- Term loans only
- Adjustable rate of SOFR + 205-400 basis points
- Minimum loan of $1 million
- No prepayment penalty
- At least according to initial program guidance, no loan forgiveness is available
Some features of the new and expanded loans differ though, such as the permitted loan origination dates, maximum loan sizes and loan fees. The divergent features are explained below.
- Maximum loan size: lower of $25 million or whatever amount that, when added to existing outstanding and committed but undrawn debt, does not exceed 4x the borrower’s 2019 EBITDA
- Loan fees:
- the borrower pays a loan origination fee of 100 basis points of the principal amount
- the lender may also require the borrower to reimburse it for an additional 100 basis point facility fee that the Federal Reserve charges the lender
- the Federal Reserve pays 25 basis points of the principal amount as an annual loan servicing fee
- Loans are unsecured
- Loans can be made from April 8, 2020 to September 30, 2020
- Maximum loan size: lower of $150 million; 30% of the borrower’s existing outstanding and committed but undrawn bank debt; or whatever amount that, when added to the existing outstanding and committed but undrawn debt, does not exceed 6x the borrower’s 2019 EBITDA
- Loan must have been originated before April 8, 2020, but expanded on a date between April 8, 2020 to September 30, 2020 (inclusive)
- Loan fees:
- the borrower pays 100 basis points of the principal of the loan extension (not of the full loan)
- the Federal Reserve pays 25 basis points of the principal of the loan extension as an annual loan servicing fee
Many, but not all, U.S. financial facilities qualify as lenders under the Program. U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies are all eligible lenders. Credit unions are not eligible lenders under the Program. Eligible Lenders will retain a five percent (5%) share of all loans originated or expanded under the Program, and the remaining 95% will be purchased by the Federal Reserve under the Program.
Interested businesses are encouraged to monitor the Federal Reserve website (https://www.federalreserve.gov/) for new details on the Main Street Lending Program, particularly after the comment period closes on April 16, and to consult with their banks, financial advisors, and attorneys to determine if they qualify. Current term sheets are also available online for the Main Street New Loan Facility and the Main Street Expanded Loan Facility.
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FOR MORE INFORMATION
For more information about the Main Street Lending Program, please contact your attorney at Gravel & Shea PC or any of the following attorneys at Gravel & Shea PC:
Peter Erly at email@example.com; Chip Mason at firstname.lastname@example.org; Cassandra LaRae-Perez at email@example.com; Oliver Goodenough at firstname.lastname@example.org; Keith Roberts at email@example.com; Pauline Law at firstname.lastname@example.org; or Catherine Burke at email@example.com.