UPDATE: Federal Reserve Board Expands Main Street Lending Program

After receiving extensive public comment during the past month, the Federal Reserve announced on April 30, 2020 that it will expand the scope and eligibility of its Main Street Lending Program (“Program”). The Federal Reserve’s recent action follows the unprecedented steps taken by the Board of Governors of the Federal Reserve on April 9, 2020, to provide up to $2.3 trillion in credit facilities to households, employers, and state and local governments in response to the COVID-19 emergency’s impact on the U.S. economy. Gibbons previously covered these newly announced programs in a client alert. The Program facilitates lending to small and medium sized businesses. The Federal Reserve received 2,200 submissions relating to the Program, and on April 30, 2020 issued two updated Term Sheets and an initial Term Sheet, which are summarized as follows:

The Program comprises the Main Street New Loan Facility (MSNLF), the Main Street Expanded Loan Facility (MSELF), and the new Main Street Priority Loan Facility (MSPLF). Below is a side-by-side comparison chart and additional details about the Program.

Program Loan Options MSNLF MSPLF MSELF
Term 4 years 4 years 4 years
Minimum Loan Size $500,000 $500,000 $10,000,000
Maximum Loan Size Lesser of $25M or 4x 2019 adjusted EBITDA Lesser of $25M or 6x 2019 adjusted EBITDA Lesser of $200M, 35% of outstanding and undrawn available debt, or 6x 2019 adjusted EBITDA
Risk Retention 5% 15% 5%
Payment (Year one deferred for all) Years 2-4: 33.33% each year Years 2-4: 15%, 15%, 70% Years 2-4: 15%, 15%, 70%
Rate LIBOR + 3% LIBOR + 3% LIBOR + 3%

In addition to creating the MSPLF, the new loan facility, which allows an eligible borrower to use the loan to refinance existing debt, the Fed lowered the minimum loan size for eligible borrowers (“Borrowers”) for the MSNLF and the MSELF to $500,000 (the previous minimum loan amount was $1 million) and expanded the scope of eligible borrowers. Certain businesses are ineligible for the Program loans (see 13 CFR 120.110(b)-(j), (m)-(s)), as modified and clarified by SBA regulations for purposes of the PPP on or before April 24, 2020. Such modifications and clarifications include the SBA’s recent interim final rules available at 85 Fed. Reg. 20811, 85 Fed. Reg. 21747, and 85 Fed. Reg. 23450). The Federal Reserve may further modify the application of these restrictions to the Program.

Pursuant to the terms of the MSNLF and the MSELF, eligible lenders retain a 5 percent share on loans, while the Fed’s special purpose vehicle (SPV) will purchase up to 95 percent. Under the new MSPLF, lenders would retain a 15 percent share on loans that, when added to existing debt, do not exceed six times the borrower’s income adjusted for interest payments, taxes, and depreciation and other appropriate adjustments, while the SPV would purchase 85 percent of the loans.

Now, Borrowers with up to 15,000 employees (an increase from 10,000 employees) or up to $5 billion in annual revenue (an increase from $2.5 billion), including affiliates, are eligible to participate in the Program.

Payment for the first year will be deferred for the MSNLF, MSELF, and MSPLF, and the rate for each loan is Libor + 3%. Eligible lenders for the Program loans are U.S. federal insured depository institutions, U.S. branches or agencies of foreign banks, U.S. bank holding companies, U.S. savings and loan holding companies, U.S. intermediate holding companies of foreign bank organizations, and U.S. subsidiaries of any of the foregoing.

In addition to the aforementioned requirements (15,000 employees and $5 billion in annual revenues), to be eligible, a Borrower must:

i. have been established under the laws of the U.S. with significant operations in and a majority of their employees based in the U.S.;
ii. have been established prior to March 13, 2020;
iii. have not participated in one of the other two Program loans or the Primary Market Corporate Credit Facility; and
iv. have not received specific support pursuant to Section 4003(b)(1)-(3) of the CARES Act (i.e., loans to passenger and cargo air carriers or businesses that maintain national security).

Significantly, businesses that have taken advantage of PPP loans may also utilize Program loans.

Program loans are not forgivable and will not convert to grants like the SBA’s PPP loans. To obtain a loan under the Program, a Borrower must submit an application and any other documentation required by an eligible lender. Borrowers should contact lenders for more information on whether a given lender plans to participate in the Program and to request more information on the application process. A Borrower does not automatically qualify for a loan under the Program. Lenders are expected to conduct an assessment of each potential Borrower’s financial condition at the time of the potential Borrower’s application and will apply their own underwriting standards in evaluating the financial condition and creditworthiness of a potential Borrower. Lenders may require additional information and documentation in making this evaluation and will ultimately determine whether Borrowers are approved for Program loans in light of these considerations. Borrowers that otherwise meet the requirements may not be approved for loans or may not receive the maximum allowable amounts. It should be noted that the Program loans have a four-year term, and Businesses should take that into account due to the economic uncertainty caused by the Coronavirus.

Eligibility and Required Certifications

To qualify for the loans, Borrowers must make specified certifications. For example, during the period of the loan, the eligible borrower must:

  • Make commercially reasonable efforts to maintain its payroll and retain its employees while the loan is outstanding;
  • Refrain from repaying the principal balance of, or paying any interest on, any debt (unless mandatory);
  • Not seek to cancel or reduce any of its committed lines of credit with any lender;
  • Certify that it has reasonable basis to believe that it can meet its financial obligations over the next 90 days and will not declare bankruptcy;
  • Follow compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under CARES Act section 4003(c)(3)(A)(ii); however, an S corporation or other tax pass-through entity that may make distributions to the extent reasonably required to cover its owner’s tax obligations in respect of the entity’s earnings; and
  • Certify that it is eligible to participate in the program, including with respect to conflicts of interest prohibited in CARES Act section 4019(b), which generally prohibits businesses directly or indirectly owned by the president, senior executive branch officials, or members of Congress, and specified family members of the aforementioned, from relief funds.

For the most part, the Program certifications and covenants are the same; however, there are two variations, as follows:

1. The eligible lender certification relating to EBITDA is different in the MSELF than it is in the MSNLF and MSPLF, owing to fact that the MSELF necessarily includes an existing loan from the eligible lender.
2. The MSPLF includes a modification to the eligible borrower covenant regarding debt repayment to allow an eligible borrower to refinance existing debt owed to a lender that is not the eligible lender at the time the MSPLF Loan is originated.

A summary of certain Program loan requirements follows:

MSNLF:

  • Eligible borrowers must either: (a) have 15,000 employees or fewer, or (b) had 2019 annual revenues of $5 billion or less.
  • Minimum loan size is $500,000.
  • Maximum loan size is either $25 million or four times the eligible borrower’s 2019 adjusted EBITDA.
  • Risk retention is 5 percent.
  • Payment for years 2-4 will be 33.33 percent each year.
  • No principal is paid in the first year.
  • Secured or unsecured.

MSPLF:

  • Eligible borrowers must either: (a) have 15,000 employees or fewer, or (b) had 2019 annual revenues of $5 billion or less.
  • Minimum loan size of $500,000.
  • Maximum loan size is either $25 million or six times the eligible borrower’s 2019 adjusted EBITDA.
  • Risk retention is 15 percent.
  • Payment for years 2-4 is 15 percent, 15 percent, and 70 percent (balloon payment), respectively.
  • No principal is paid in the first year.
  • Secured or unsecured.

MSELF:

  • Eligible borrowers must either: (a) have 15,000 employees or fewer, or (b) had 2019 annual revenues of $5 billion or less.
  • Minimum loan size is either $10 million or 35 percent of outstanding and undrawn available debt.
  • Maximum loan size of $200 million.
  • Risk retention is 5 percent.
  • Payment for years 2-4 is 15 percent, 15 percent, and 70 percent, respectively.
  • No principal is paid in the first year.
  • Secured or unsecured. An MSELF Upsized Tranche must be secured if the underlying loan is secured.

For additional information see the Term Sheets and related information at the following Federal Reserve website news page.

You may also like...