Yesterday (April 30, 2020), the Federal Reserve released the most current terms of the Main Street Lending Program. While the loan facility, as authorized by the CARES Act, has yet to take effect, the period for public comment has ended.
Michelman & Robinson previously posted an alert prior to the close of the pubic comment period answering questions about the plan. As we anticipate the Main Street Lending Program’s imminent roll out, we thought it important to provide this update that includes the latest information (mostly applicable to borrowers) from the Fed. Of note, the terms of the program are not final and subject to change.
Q. Exactly what is the Main Street Lending Program?
A. Officially called the Main Street New Loan Facility, the program—jointly established by the Fed and U.S. Treasury Department—provides up to $600B to qualifying borrowers who can access loans of between $1M and $25M from eligible lenders (e.g., U.S. insured depository 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 15,000 employees or fewer or $5B or less in 2019 annual revenues. To qualify for a Main Street Lending Program loan, these businesses must have been created or organized in the U. S. (or under U.S. laws), with significant operations—and a majority of their employees—based in the U.S. In addition, borrowers must have been established prior to March 13, 2020 and have not received support under the Coronavirus Economic Stabilization Act of 2020. Of note, a borrower deemed eligible for a loan under the Main Street Lending Program may have also received a PPP loan.
Q. What are the terms of loans under the Main Street Lending Program?
A. Loans obtained by way of the Main Street Lending Program will:
- Be secured or unsecured and have been originated after April 24, 2020
- Have four-year maturities
- Have interest and principal deferred for one year
- Bear an adjustable interest rate of LIBOR (one or three month) plus 300 basis points
- Have principal amortization of 1/3 at the end of the second and third years and at maturity at the end of year four
- Be eligible for prepayment without penalty
- Be subject to origination and servicing fees payable by the borrower of up to 100 basis points (which a lender may require the borrower to pay)
- At the time of origination or during the term of the loan, not be contractually subordinated in terms of priority to any other loans or debt instruments
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 $500,000 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 adjusted 2019 EBITDA.
Q. Does the Main Street Lending Program require borrower certifications?
A. Yes, in order to receive a qualifying loan, borrowers must certify that they (1) have a reasonable basis to believe they are able to meet financial obligations for at least the next 90 days (and do not expect to file bankruptcy during that time period), and (2) are eligible to participate in the Main Street Lending Program (taking into account any conflicts prohibited in the CARES Act).
Q. Are there any other commitments that a borrower must make in connection with receiving loans under the Main Street Lending Program?
A. Yes, each borrower must attest that it will follow compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under the CARES Act, except that an S corporation or other tax pass-through entity may make distributions to the extent reasonably required to cover an owners’ tax obligations with respect to the entity’s earnings. Further, if the borrower had other prior loans outstanding as of December 31, 2019 with its Main Street Lending Program lender, such loans must have had an internal risk rating equivalent to a “pass” in the Federal Financial Institutions Examination Council’s supervisory rating system on that date.
Q. Are there restrictions related to Main Street loans?
A. Yes, in addition to the foregoing certifications and commitments, borrowers must commit not to repay the principal balance of (or any interest on) any debt (unless it is mandatory to do so) until their loans obtained under the Main Street Lending Program are repaid in full. Also, borrowers must promise not to cancel or reduce any of their committed lines of credit with any lender, including lenders under the Main Street Lending Program. Further, borrowers must make commercially reasonable efforts to maintain payroll and retain employees during the time the loan is outstanding.
Q. When will the Main Street Lending Program terminate?
A. Subject to extension, the Main Street Lending Program will cease purchasing participations in eligible loans on September 30, 2020. The Federal Reserve, however, will continue to fund the Special Purpose Vehicle (SPV) until the SPV’s underlying assets mature or are sold.
Q. Big picture, what is the difference between a PPP loan and a loan under the Main Street Lending Program.
A. The short answer is a lot. The purpose of PPP loans is to keep small businesses afloat in the wake of the coronavirus crisis, and help them to retain their employees on payroll by way of short-term, forgivable loans up to $10M. As such, when used properly, PPP loans are more like grants (free money to qualifying small businesses). Loans under the Main Street Lending Program are a different animal altogether. Among other things, they are geared toward medium-sized companies, are not forgivable, have borrower-paid fees associated with them, are administered by the Fed (not the SBA), contemplate different terms and maturity dates, and are larger in size (up to $25M).
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.