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The Main Street Lending Program looks to be the next source of funding in the Federal Reserve’s efforts to provide capital to businesses. The Main Street Lending Program was designed to support small and medium-sized businesses that are unable to access the Paycheck Protection Program (“PPP”) or that require additional financial support after receiving a PPP loan.

On April 30, 2020, the Federal Reserve announced the expansion of the Main Street Lending Program. The expansion added a new loan facility, the Main Street Priority Loan Facility (“MSPLF”) and expanded eligibility and eased restrictions for the initial two loan facilities, the Main Street New Loan Facility (“MSNLF”) and the Main Street Expanded Loan Facility (“MSELF”).  The Federal Reserve also issued new FAQs.

So which loan may be right for you? All three facilities use the same lender and borrower criteria, and contain many of the same terms, such as the maturity, interest rate, deferral of principal and interest for one year, and the ability of the borrower to prepay without premium. The facilities differ with respect to the minimum and maximum loan amounts and how they interact with a borrower’s existing outstanding debt.

In this article we will go through the general terms and conditions of each facility, the key differences between each and the takeaways for borrowers and lenders.

A Comparison

Below is a detailed comparison of the three facilities. Click here to view a pdf of the chart.

MAIN STREET NEW LOAN FACILITY MAIN STREET PRIORITY LOAN FACILITY MAIN STREET EXPANDED LOAN FACILITY
Type of Funding New term loans originated after April 24, 2020 New term loans originated after April 24, 2020 Fund increases to previously existing term loans or revolving credit facilities originated on or before April 24, 2020, that have a remaining maturity of at least 18 months

NOTE: Lender may extend the maturity of an existing loan or revolving credit facility at the time of upsizing for the underlying instrument to satisfy the 18-month remaining maturity requirement.

Eligible Lender U.S. federally insured depository institutions (including banks, savings associations and credit unions), U.S. branches of foreign banks, U.S. bank holding companies, U.S. intermediate holding companies of foreign banking organizations, or U.S. subsidiaries of any of the foregoing
Eligible Borrower Borrowers are eligible if they satisfy the following conditions:

  1. Are a for-profit partnership, limited liability company, corporation, association, trust, cooperative, joint venture with no more than 49 percent participation by foreign business entities, or tribal business concern as defined in 15 U.S.C. §657a(b)(2)(C);
  2. Are created or organized in the U.S. or under the laws of the U.S. with significant operations in and a majority of their employees based in the U.S.;
  3. Were established prior to March 13, 2020;
  4. Are not an ineligible business listed in 13 CFR 120.110(b)-(j) and (m)-(s), as modified by the SBA regulations implementing the PPP on or before April 24, 2020, including 85 Fed. Reg. 20811, 85 Fed. Reg. 21747, and 85 Fed. Reg. 23450;[1]
  5. Have 15,000 employees[2] or fewer OR had 2019 annual revenues of $5 billion or less[3]; and
  6. Were in sound financial condition prior to the onset of the COVID-19 pandemic[4].

NOTE: Although the Main Street Lending Program is not a SBA program and will not be administered by the SBA certain SBA rules apply. Borrowers will need to calculate the number of employees and revenues of the borrower and the borrower’s affiliates in accordance with the SBA’s affiliation rules.

NOTE: The requirements above are only the minimum eligibility requirements. Additional covenants, certifications and conditions are listed below. Lenders are also expected to assess each potential borrower’s financial condition at the time of the potential borrower’s application.

Maximum Loan Amount Lesser of:

  1. $25 million; or
  2. An amount that, when added to existing outstanding and undrawn available debt[5], does not exceed four times the borrower’s 2019 EBITDA.[6]
Lesser of:

  1. $25 million; or
  2. An amount that, when added to existing outstanding and undrawn available debt, does not exceed six times the borrower’s 2019 EBITDA.
Lesser of:

  1. $200 million; or
  2. 35% of the borrower’s existing outstanding and undrawn available debt that is equal in priority and secured status (i.e., secured or unsecured) with the loan; or
  3. An amount that, when added to existing outstanding and undrawn available debt, does not exceed six times the borrower’s 2019 EBITDA.
Minimum Loan Amount $500,000 $10,000,000
Interest Rate Adjustable rate of LIBOR (1 or 3 month) + 300 basis points[7]
Loan Term 4 years
Use of Proceeds No know restrictions on the use of proceeds other than the restrictions on the repayment of other debt and restrictions on executive compensation, stock repurchase and distributions, which are described below.[8]
Amortization Year 1: Principal and interest payments deferred (unpaid interest will be capitalized).

Year 2: 1/3 of principal due at the end of the second year.

Year 3: 1/3 of principal due at the end of the third year.

End of Year 4: 1/3 of principal due at maturity.

Year 1: Principal and interest payments deferred (unpaid interest will be capitalized).

Year 2: 15% of principal due at the end of the second year.

Year 3: 15% of principal due at the end of the third year.

Year 4: Balloon payment of 70% of principal due at maturity.

Prepayment Penalty None
Collateral Secured or Unsecured Secured or Unsecured

NOTE: Any collateral securing the existing loan (at the time of upsizing or on any subsequent date), must secure the upsized tranche on a pro rata basis.

Priority At the time of origination or any time during the term of the loan, the loan may not be contractually subordinated in terms of priority to any of the borrower’s other loans or debt instruments. A MSNLF loan may not be junior in priority in bankruptcy to the borrower’s other unsecured loans or debt instruments.

This restriction does not prevent:

  • the issuance of a MSNLF loan that is a secured loan (including in a second lien or other capacity),
  • the issuance of a MSNLF loan that is an unsecured loan, or
  • new secured or unsecured debt after receiving an MSNLF loan (provided the new debt would not have higher contractual priority in bankruptcy than the MSNLF loan).
At the time of origination and at all times thereafter the loan is outstanding, the loan must be senior to or equal with, in terms of priority and security, the borrower’s other loans or debt instruments, other than mortgage debt. At the time of upsizing and always the upsized tranche is outstanding, the upsized tranche must be senior to or equal with, in terms of priority and security, the borrower’s other loans or debt instruments, other than mortgage debt.
Participation Amount Retained by Lender 5% 15% 5%
Termination Date of the Loan Program September 30, 2020, unless otherwise extended.

NOTE: The Federal Reserve Bank will continue to fund the operation of the Special Purpose Vehicle (SPV) after September 30, 2020 until the SPV’s underlying assets mature or are sold.

Restrictions on Repayment of Other Debt The borrower must commit to refrain from repaying the principal balance of, or paying any interest on, any debt until the new loan is repaid in full, unless the debt or interest payment is mandatory and due.

NOTE:  Borrowers will still be able to (i) repay a line of credit (including a credit card) in the normal course, (ii) incur equipment financing or similar debt in the ordinary course (as long as it is secured by newly acquired property and is otherwise lower priority), and (iii) refinance maturing debt.

Borrowers may refinance existing debt owed to a lender that is not the lender making the MSPLF loan at the time the MSPLF loan is originated.  Otherwise, the borrower must commit to refrain from repaying the principal balance of, or paying any interest on, any debt until the new loan is repaid in full, unless the debt or interest payment is mandatory and due.

NOTE:  Borrowers will still be able to (i) repay a line of credit (including a credit card) in the normal course, (ii) incur equipment financing or similar debt in the ordinary course (as long as it is secured by newly acquired property and is otherwise lower priority), and (iii) refinance maturing debt.

The borrower must commit to refrain from repaying the principal balance of, or paying any interest on, any debt until the upsized tranche is repaid in full, unless the debt or interest payment is mandatory and due.

NOTE:  Borrowers will still be able to (i) repay a line of credit (including a credit card) in the normal course, (ii) incur equipment financing or similar debt in the ordinary course (as long as it is secured by newly acquired property and is otherwise lower priority), and (iii) refinance maturing debt.

Restrictions on Existing LOCs The borrower must commit that it will not seek to cancel or reduce any of its committed lines of credit with the lender or any other lender.

NOTE:  Borrowers will still be able to (i) reduce or terminate uncommitted lines of credit, (ii) let existing lines of credit expire in accordance with their terms, (iii) reduce availability under existing lines of credit in accordance with their terms due to changes in borrowing bases or reserves in asset-based or similar structures.

Solvency Certification The borrower must certify that it has a reasonable basis to believe that, as of the date of origination of the new loan (or the date of the upsizing in the case of a MSELF 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.
Restrictions on Executive Compensation, Stock Repurchase and Distributions Until 12 months after the date the loan has been repaid in full the borrower must commit that it will not:

  • Repurchase equities securities listed on a national securities exchange of the borrower or its parent company (except if required under contractual obligations entered into prior to March 27, 2020).
  • Pay dividend payments or capital distributions on common stock of the borrower.
  • Pay any officer of employee whose compensation exceeded $425,000 in calendar year 2019 (other than an employee whose compensation is determined through an existing collective bargaining agreement entered prior to March 1, 2020):
    • more than such person’s 2019 total compensation during any 12 consecutive month period
    • more than twice such person’s 2019 total compensation in severance pay.
  • Pay any officer or employee whose compensation exceeded $3 million in calendar year 2019 more than $3 million plus 50% of the amount above $3 million that such person received in calendar year 2019 during any 12 consecutive month period.

NOTE: The restriction on distributions does not apply to distributions made by an S corporation or other tax pass-through entity to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings.

Conflict of Interest Certification The borrower must certify that it is eligible to participate in the program, including in light of the conflicts of interest prohibition in Section 4019(b) of the CARES Act.[9]
COVID-19 Need Borrowers must make commercially reasonable efforts to maintain their payroll and retain their employees during the term of the loan (or the upsized tranche in the case of a MSELF loan).

NOTE:  What constitutes as “commercially reasonable efforts?”  Borrowers will need to use good-faith efforts to maintain payroll and retain employees considering its capacities, the economic environment, its available resources, and the business need for labor.  Borrowers that have already laid-off or furloughed workers as a result of the disruptions from COVID-19 are still eligible to apply for Main Street Lending Program loans.

Lender Certifications and Covenants
  • Repayment of Other Debt: The lender will not require that the borrower use the loan proceeds to repay debt owed to the lender, or pay interest on such outstanding obligations, until the new loan (or the upsized tranche of an existing loan in the case of a MSELF loan) is repaid in full, unless the debt or interest payment is mandatory and due, or in the case of default and acceleration.
  • Existing LOCs: The lender will not cancel or reduce any existing committed lines of credit to the borrower, except in an event of default.

    NOTE
    :  This requirement does not prohibit the reduction or termination of uncommitted lines of credit, the expiration of existing lines of credit in accordance with their terms, or the reduction of availability under existing lines of credit due to changes in borrowing bases or reserves in asset-based or similar structures.
  • Calculation of 2019 EBITDA: The lender must certify that the methodology used for calculating the borrower’s 2019 EBITDA is the methodology it had previously used for adjusting EBITDA when extending credit to the borrower or similarly situated borrowers on or before April 24, 2020 (or when originating or amending the existing loan on or before April 24, 2020, in the case of a MSELF loan).
  • Eligibility: The lender must certify that it is eligible to participate in the program, including considering the conflicts of interest prohibition in Section 4019(b) of the CARES Act.
Fees
  • Transaction Fee: The lender will pay the SPV a transaction fee of 100 basis points of the principal amount of the new loan at the time of origination. It may be passed through to the borrower.
  • Origination Fee: The borrower will pay the lender an origination fee of up to 100 basis points of the principal amount of the new loan at the time of origination.
  • Servicing Fee: The SPV will pay he lender 25 basis points of the principal amount of its participation in the new loan per year for loan servicing.
  • Transaction Fee: The lender will pay the SPV a transaction fee of 75 basis points of the principal amount of the upsized tranche at the time of upsizing.  It may be passed through to the borrower.
  • Origination Fee: The borrower will pay the lender an origination fee of up to 75 basis points of the principal amount of the upsized tranche at the time of upsizing.
  • Servicing Fee: The SPV will pay the lender 25 basis points of the principal amount of its participation in the upsized tranche per year for loan servicing.
Loan Forgiveness No.
Participation in Other CARES Act Programs Borrowers may only participate in one of the following loan programs: MSNLF, MSELF, MSPLF or the Primary Market Corporate Credit Facility.[10]  Borrowers may receive more than one loan under a single Main Street facility so long as the loans taken together do not exceed the maximum loan amount applicable to such facility.

Borrowers may not participate in the Main Street Lending Program if they have received specific support pursuant to the CARES Act designated for passenger air carriers, cargo air carriers or businesses critical to maintaining national security.

Borrowers may have both a PPP Loan and a Main Street Loan facility.

 

Key Differences

  • Type of Funding – The MSNLF and the MSPLF are new term loans. The MSELF is an increase to previously existing term loans or revolving credit facilities.
  • Loan Amount – The MSNLF and the MSPLF loans range in size from $500,000 to $25,000,000, while the MSELF upsized tranches range in size from $10,000,000 to $250,000,000. The maximum loan amount under each facility is dependent upon varying levels of the Borrower’s existing outstanding and undrawn available debt (four times the borrower’s 2019 EBITDA for the MSNLF and six times the Borrower’s 2019 EBITDA for the MSPLF and the MSELF). The maximum loan amount for the MSELF is further limited to 35% of the borrower’s existing outstanding and undrawn available debt that is equal in priority and secured status (i.e., secured or unsecured) with the loan.
  • Repayment of Main Street Loan – Principal and interest are deferred for one year for each facility. After the first year, MSNLF loans amortize equally over the remaining three years, while MSPLF and MSELF loans amortize 30% (in the aggregate) over the following two years with a 70% balloon payment due at the end of the fourth year.
  • Participation Amount Retained by Lender – The lender retains 5% under each of the MSNLF and MSELF facilities and retains 15% under the MSPLF facility.
  • Priority – Loans and upsized tranches under the MSPLF and MSELF facilities must be senior to or equal with, in terms of priority and security, the borrower’s other loans or debt instruments, other than mortgage debt. Loans under the MSNLF may not be contractually subordinated in terms of priority to any of the borrower’s other loans or debt instruments.
  • Repayment of Other Debt – Only the MSPLF may be used to refinance existing debt. Proceeds may be used to refinance other debt at the time of origination so long as such debt is not held by the lender.
  • Fees – Lenders and borrowers will pay lower Origination and Transaction Fees under the MSELF facility (100 basis points under the MSNLF and the MSPLF facilities, and 75 basis points under the MSELF facility).

Takeaways

For Borrowers:
  • There is no automatic qualification if borrowers meet the minimum eligibility requirements set forth above.
  • Borrowers will need to apply the SBA affiliation rules applicable to the PPP loan program. Private equity and VC-backed companies should understand whether employees or revenues of affiliated entities will need to be included in determining eligibility. See our article on the affiliation rules for portfolio companies
  • Borrowers should review existing debt documents to see if any amendments or waivers may be needed. Existing lenders will need to agree to the subordination provisions required under each facility.
  • A borrower is not obligated to provide an attestation that it requires financing due to the exigent circumstances presented by COVID-19. However, a borrower will need to use good-faith efforts to maintain payroll and retain employees considering its capacities, the economic environment, its available resources, and the business need for labor. Borrowers that have already laid-off or furloughed workers as a result of the disruptions from COVID-19 are still eligible to apply for Main Street Lending Program loans.
  • While EBITDA is the key underwriting metric for the Main Street Lending Program the Federal Reserve noted in the FAQs that it will be evaluating the feasibility of adjusting the loan eligibility metrics for asset-based borrowers given that credit risk for such borrowers is generally not evaluated based on EBITDA.
  • While nonprofits are not currently eligible under the program, the Federal Reserve recognizes the critical role that nonprofit organizations play throughout the economy and indicated that it is evaluating a separate approach to meet their unique needs. Other forms of for-profit businesses may be considered for inclusion under the Main Street Lending Program at the discretion of the Federal Reserve.
  • The Federal Reserve expects to disclose the names of lenders and borrowers, amounts borrowed and interest rates charged, overall costs, revenues and other fees.
For Lenders:
  • Lenders will need to assess the prospective borrower’s financial condition and apply their own underwriting standards.
  • Lenders may rely on their borrowers’ certifications and covenants, as well as any subsequent self-reporting by their borrowers. Lenders do not need to independently verify the certifications or actively monitor ongoing compliance with the covenants required by the Main Street term sheets. If a lender becomes aware that a borrower made a material misstatement or otherwise breached a covenant during the term of a Main Street loan the lender should notify the Federal Reserve Bank of Boston.
  • Lenders should start putting together loan document packages that include the required certifications and covenants. The documents should also contain an alternate for LIBOR based on the Fallback Contract Language from the ARRC.
  • The Federal Reserve does not include non-bank lenders in its list of lenders; however, the Federal Reserve is considering expanding this list.
  • The Federal Reserve’s release does not include the necessary documentation for lenders to sell loan participations to the SPV. It is anticipated that these documents, as well as other guidance for lenders participating in the Main Street Lending Program, will be made available before the start date of the program.
  • The Federal Reserve expects to disclose the names of lenders and borrowers, amounts borrowed, interest rates charged, overall costs, revenues and other fees.

The Federal Reserve has not set a launch date for the Program. Updates regarding the Program, including the official start date and when the Main Street SPV will begin purchasing participations in the Main Street loans will be made available on the Federal Reserve’s Main Street page.  In the meantime, interested borrowers should reach out to their lenders to start discussions regarding what the lenders may require as part of the underwriting process.

Our team of attorneys is here to help you analyze the availability and features of these lending programs.  For more information on the Main Street Lending Program and other financial assistance under the CARES Act, please contact Becky Moore, Amanda England, Maria Kroeger, Meghan Jackson Tyson or any attorney in Frost Brown Todd’s Financial Services Industry Team.

To provide guidance and support to clients as this global public-health crisis unfolds, Frost Brown Todd has created a Coronavirus Response Team. Our attorneys are on hand to answer your questions and provide guidance on how to proactively prepare for and manage any coronavirus-related threats to your business operations and workforce.

[1] This includes financial businesses primarily engaged in the business of lending, such as banks, finance companies and factors, passive businesses owned by developers or landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds, life insurance companies, businesses located in a foreign county (although businesses owned by foreign aliens or entities may qualify), government-owned entities, businesses primarily engaged in political or lobbying activities and speculative businesses. The Federal Reserve FAQs note that it may further modify the application of these restrictions.

[2] Businesses will need to count all full-time, part-time, seasonal or otherwise employed persons (excluding volunteers and independent contractors) employed by the borrower and all of its affiliates as employees (See 13 CFR 121.106).  Businesses should use the average total number of persons employed by the borrower and its affiliates for each pay period over the 12 months prior to the origination or upsizing of the loan.

[3] A borrower (and its affiliates) may use either one of the following methods to calculate 2019 annual revenues for purposes of determining eligibility: (1)  annual “revenue” per its 2019 GAAP-based audited financial statements; or (2 annual receipts (as defined by the SBA in 13 CFR 121.104(a)) for the fiscal year 2019, as reported to the IRS. If a potential borrower (or its affiliate) does not yet have audited financial statements or annual receipts for 2019, the borrower (or its affiliate) should use its most recent audited financial statements or annual receipts.

[4] For MSNLF and MSPLF loans, if a borrower had other loans outstanding with the lender as of December 31, 2019, such loans must have had an internal risk rating equivalent to a “pass” in the Federal Financial Institutions Examination Council’s (FFIEC) supervisory rating system on that date. For MSELF loans, the existing loan must have had an internal risk rating equivalent to a “pass” in the FFIEC’s supervisory rating system as of December 31, 2019.

[5] Existing outstanding and undrawn available debt does not include (1) any undrawn commitment that serves as a backup line for commercial paper issuance, (2) any undrawn commitment that is used to finance receivables (including seasonal financing inventory), (3) any undrawn commitment that cannot be drawn without additional collateral, or (4) any undrawn commitment that is no longer available due to change in circumstance.

[6] The methodology used by the lender to calculate a borrower’s 2019 earnings before interest, taxes, depreciation and amortization (EBITDA) must be a methodology previously used by the lender for adjusting EBITDA when extending credit to the borrower or to similarly situated borrowers on or before April 24, 2020 (or the methodology previously used by the lender to calculate adjusted EBITDA when originating or amending the underlying loan on or before April 24, 2020, for MSELF loans). The Federal Reserve recognized that the credit risk of asset-based borrowers is generally not evaluated based on EBITDA.  The Federal Reserve and the Treasury Department will be evaluating the feasibility of adjusting the loan eligibility metrics of the Main Street Lending Program for such borrowers.

[7] The loan documents should include fallback contract language if London Inter-bank Offered Rate (LIBOR) becomes unavailable during the term of the loan consistent with the recommendations of the Alternative Reference Rates Committee (ARRC).

[8] The initial term sheets for the MSNLF and the MSELF issued on April 9, 2020, expressly required the use of loan proceeds to maintain the borrower’s payroll and retain its employees during the term of the loan.  However, the revised term sheets for the MSNLF and the MSELF and the new term sheet for the MSPLF issued on April 30, 2020, removed this express requirement and replaced it with a covenant to use commercially reasonable efforts to maintain the borrower’s payroll and retain its employees.

[9] Section 4019(b) prohibits any entity “controlled” by the President, Vice President, head of an Executive Department, or Member of Congress or by any of their immediate family (including son or daughter-in-law) from being eligible as a borrower or lender under the Main Street Lending Program.

[10] The Primary Market Corporate Credit Facility (PMCCF) is a lending program released by the Federal Reserve, which is open to investment grade companies and will provide bridge financing of four years. The facility supports large companies through the purchase of eligible corporate bonds from, and lending through syndicated loans to, large companies. PMCCF loans are not forgivable. The term sheet detailing the features of that program can be found here.