May 12, 2020
On April 30, 2020, the Federal Reserve announced it expanded eligibility for the forthcoming Main Street Lending Program. The program will provide loans to small and medium-sized companies. The process will be facilitated by banks, but the Federal Reserve shall buy 95% of each approved loan extended by banks under the program. The Federal Reserve has indicated it shall purchase up to $600 billion in participating loans. The infrastructure and paperwork supporting the operations of the program have yet to be made public, but are forthcoming. This update is intended to provide an overview of eligibility for and loan terms under the Main Street Lending Program.
Businesses that meet the following criteria shall be eligible for financing under the Main Street Lending Program:
- Employ 15,000 employees or less (including employees of affiliates) or 2019 annual revenues equal to or less than $5 billion (including 2019 annual revenues of all affiliates);
- In operation prior to March 13, 2020;
- Created in the United States or under the laws of the United States;
- Significant operations in the United States;
- Majority of its employees based in the United States;
- Must not be a business that is ineligible for SBA funding due to the nature of its business, as set forth by the SBA, including, for example only: financing business primarily engaged in the business of lending, pyramid sale distribution plans, business deriving more than one-third of gross annual revenue from legal gambling activities, etc. (for a full list of businesses that are ineligible for SBA funding, see 13 CFR 120.110 (b)?(j), (m) ?(s), as modified by the CARES Act and rules promulgated thereunder);
- Must make all of the certifications and covenants required under the program, including that:
- it will not repay the principal balance of, or pay any interest on, any other debt until the loan through the Main Street Lending Program is repaid in full unless such payments are mandatory and due;
- it will not seek to cancel or reduce any of its current financing;
- it has a reasonable basis to believe that, as of the date of the loan and after giving effect to such loan, it has the ability to meet its financial obligations for at least the next 90 days and does not expect to file for bankruptcy during that time period;
- through the duration of the loan term and for a period of 12 months following maturity, it will abide by the following compensation, stock repurchase and capital distribution restrictions that apply to it under direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act (excluding distributions made by S-Corps or other pass-through tax entities as reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings):
- it will not repurchase an equity security that listed on a national securities exchange of the business or any parent company of the business, except to the extent required under a contractual obligation that was in effect on or before March 27, 2020;
- it will not pay dividends or make other capital distributions with respect to the common stock of the business;
- for officers or employees with total compensation over $425,000 in calendar year 2019, it shall not compensate such officer or employee in excess of what was received by the officer or employee in calendar year 2019;
- for officers or employees with total compensation over $3 million in calendar year 2019, it shall not compensate such officer or employee in excess of $3 million and 50% of the excess over $3 million of what was received in calendar year 2019; and
- if an officer or employee is terminated, it will not make severance payments or other benefits received upon termination to officers or employees in amounts that exceed two times (2x) the total compensation received by the officer or employee in calendar year 2019;
- it is eligible to participate in the program, including that it is not controlled directly or indirectly by an extensive list of federal government officials or their relatives, as prohibited by section 4019(b) of the CARES Act.
Eligibility is further restricted by participation in other federally-backed financing. Specifically, to be eligible for the Main Street Lending Program, a business: (1) must not participate in the Primary Market Corporate Credit Facility; and (2) must not have received specific support pursuant to the Coronavirus Economic Stabilization Act of 2020. Businesses that have participated in the SBA’s Paycheck Protection Program are not ineligible for the Main Street Lending Program solely due to their participation in the Paycheck Protection Program.
Loan Facilities and Amounts
Under the Main Street Lending Program, there are three loan facilities available to eligible borrowers. However, an eligible borrower may only be approved for one of the three facilities:
- Main Street New Loan Facility (“MSNLF”): loan in an amount equal to the lesser of: (1) $25 million, or (2) four times (4x) the borrower’s 2019 adjusted EBITDA.
- Main Street Priority Loan Facility (“MSPLF”): loan in an amount equal to the lesser of: (1) $25 million, or (2) six times (6x) the borrower’s 2019 adjusted EBITDA.
- Main Street Expanded Loan Facility (“MSELF”): as the name suggests, the MSELF provides for the expansion of an existing secured or unsecured term loan or revolving credit facility that was originated on or before April 24, 2020 as long as that underlying loan has a remaining maturity of at least 18 months. Under the MSELF, minimum loan sizes are $10 million and maximum loan sizes are the lesser of: (1) $200 million, (2) 35% of the business’ outstanding and undrawn available debt, or (3) an amount that does not exceed six times (6x) the business’ 2019 adjusted EBITDA.
All loans under the Main Street Lending Program mature at a date four years from disbursement and accrue interest at the LIBOR plus 3%. Payments on Main Street Lending Program loans are deferred for a period of one year, with any unpaid interest being capitalized. MSNLF loans are amortized over the remaining term of the loan with one-third of principal due at the end of each of years 2, 3, and 4. MSPLF and MSELF loans, on the other hand, are amortized over the remaining term of the loan with 15% of the principal due at the end of each of years 2 and 3, and a balloon payment of the remaining 70% of principal due at the end of year 4. Prepayment is permitted on all facilities without penalty.
Unlike other federally-backed financing responsive to the COVID-19 pandemic, borrowers will not have any opportunity for forgiveness of loans extended pursuant to the Main Street Lending Program.
Visit our COVID-19 Task Force or The Board of Governors of the Federal Reserve System for more information and ongoing updates.
This article was authored by Tyler Duff, Jonathan Boulahanis, Kent Carter, and Craig Heryford.