In an ongoing effort to bolster the U.S. economy hit hard by the COVID-19 pandemic, the Federal Reserve and the Department of the Treasury announced this morning the preliminary details of the Main Street New Loan Facility (Main Street Lending Program) authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
The Main Street Lending Program is part of a larger $2.3T round of loans, which together seek to provide additional support to small businesses, consumers, and now states and local governments.
What is critical to understand is that the details of the Main Street Lending Program, though made public today, continue to be a work in progress and subject to open comment through April 16, 2020 and subsequent adjustment and revision. In the meantime, Michelman & Robinson answers questions you may have about this new loan facility.
Q. Exactly what is the Main Street Lending Program?
A. As referenced above, the program is officially called the Main Street New Loan Facility, which provides up to $600B jointly established by the Fed and Treasury to qualifying borrowers, who can access loans of between $1M and $25M from eligible lenders (e.g., U.S. insured depositary institutions, U.S. bank holding companies, and U.S. savings and loan holding companies).
Q. What borrowers are eligible for loans under the Main Street Lending Program?
A. Eligible borrowers are businesses with up to 10,000 employees or up to $2.5B in 2019 annual revenues. Likewise, to qualify for a Main Street Lending Program loan, each borrower must be a business that is created or organized in the U. S. (or under U.S. laws), with significant operations—and a majority of its employees—based in the U.S.
Q. In the Main Street Lending Program’s preliminary form (as just announced), what are the anticipated loan terms?
A. Subject to revision once the open comment period ends on April 16, 2020, loans will:
• Be unsecured and originated after April 8, 2020
• Have four-year maturities
• Have interest and principal deferred for one year
• Bear an adjustable interest rate equal to the Fed’s secured overnight financing rate plus between 250 and 400 basis points
• Be eligible for prepayment without penalty
• Be subject to an origination fee payable by the borrower of 100 basis points, and a participation fee payable by lenders of 100 basis points (which a lender may require the borrower to pay)
Q. Are there minimum and maximum amounts for the loans under the Main Street Lending Program?
A. Yes, loans must be for a minimum of $1M and a maximum of the lesser of (1) $25M or (2) an amount, when added to the borrower’s existing debt, which does not exceed four times the borrower’s EBITDA.
Q. Does the Main Street Lending Program require borrower certifications?
A. Yes, in order to receive a qualifying loan, borrowers must attest that they require the funds because of the COVID-19 pandemic.
Q. Are there restrictions on the use of loan proceeds?
A. Yes, both the lender and borrower must attest—and the borrower must commit—that proceeds lent pursuant to the Main Street Lending Program will not be used to repay or refinance existing indebtedness of the borrower. Further, the borrower may not pre-pay any existing loan balances and may not pay any other debt of equal or junior priority other than mandatory principal payments of such debt until the loan under the Main Street Lending Program is paid in full. Also, the borrower cannot cancel or reduce any of its existing lines of credit, and must commit to make reasonable efforts to maintain its payroll and retain its employees until the loan is repaid.
Q. Are there any other commitments that a borrower must make in connection with receiving loans under the Main Street Lending Program?
A. Yes, the borrower must attest that it will follow compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act, and lenders and borrowers will each be required to certify that the entity is eligible to participate in the Main Street Lending Program, including in light of the conflicts of interest prohibition in section 4019(b) of the CARES Act.
Again, the Main Street Lending Program is subject to open comment until April 16, 2020. M&R would be happy to submit comments on your behalf, or you can do so directly here.
This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.