Main Street Lending Program: What Small and Mid-Sized Businesses Need to Know
On April 9, 2020, the Federal Reserve released guidance for the Main Street Lending Program, a new $600 billion fund aimed to protect credit flows to small and mid-sized businesses that were in good standing before the COVID-19 pandemic.
About the Main Street Lending Program
This program is designed to support mid-market and upper-market businesses that may not have qualified for Paycheck Protection Program loan. The new program offers – low interest, four-year loans for businesses with up to 10,000 employees or with revenues of $2.5 billion or less for 2019.
The program offers two routes for borrowers: The Main Street New Loan Facility (MSNLF) or the Main Street Expanded Loan Facility (MSELF). Both have a 95% guarantee from a Federal Reserve Bank-created Special Purpose Vehicle (SPV), which means lenders will only be responsible for 5% of that loan’s credit risk. Borrowers can only choose one or the other, so here are a few key takeaways about each of the loan facilities:
Main Street New Loan Facility (MSNLF)
Under the MSNLF program, borrowers can ask for a minimum of $1 million, and up to $25 million at a 1% fee. The loan amount is calculated by taking a company’s earnings before interest, tax, depreciation and amortization (EBITDA) for 2019 and multiplying it by four. This amount also must be added to current outstanding but undrawn debt. Under the MSNLF, eligible loans must be unsecured term loans originated on or after April 8, 2020. Key features summary:
- Four-year maturity
- Amortization of principal and interest deferred for one year
- Adjustable rate of Secured Overnight Financing Rate (SOFR) plus 250-400 basis points
- Minimum loan size of $1 million
- Maximum loan size of $25 million or an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed four times the borrower’s 2019 EBITDA, whichever is lesser
- Prepayment permitted without penalty
Main Street Expanded Loan Facility (MSELF)
The MSELF allows borrowers to draw on existing loans made before April 8, 2020. It also allows borrowers to ask for a minimum of $1 million up to $150 million by calculating 2019 EBIDTA times six, with the same stipulation as the MSNLF, that the EBIDTA calculation must include outstanding, committed undrawn debt. Under the MSELF, an eligible upsized term loan will have most of the same features of an eligible loan under the MSNLF. Key features summary:
- The original facility must have been made by a lender to an eligible borrower on or before April 8, 2020
- Collateral securing the existing eligible term loan will secure the MSELF upsized tranche on a pro rata basis
- The maximum loan size is $150 million, 30% of the borrower’s existing outstanding and committed but undrawn bank debt, or an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed six times the borrower’s 2019 EBITDA, whichever is lesser
For both the MSNLF and MSELF, the leverage test uses simply EBITDA, and does not include adjustments or “addbacks” that are often seen in leveraged credit facilities. The leverage calculation includes undrawn commitments as debt and does not appear to have a cash netting feature. For existing loans under the MSELF, borrowers may need to recalculate EBITDA without any addbacks to find the maximum loan size cap.
Highlights of Main Street Lending Program Loan Terms
Both Main Street Lending Program loan types are four-year terms with adjustable SOFR of 250-400 basis points. The basis points translate into interest rates for the loans, which means that banks get between 2.5% and 4% spread over the borrowing cost. The loans are not forgivable, but amortization and interest are deferred for one year. Additionally, borrowers are not penalized for pre-payment on the loans in this program.
Borrowers must be 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.
How Main Street Lending Program Loan Funds Can Be Utilized
The primary purpose of the program is to cover payroll. Borrowers must make a few important attestations regarding their intent with the loans, most importantly that they need the financing due to the impact of the COVID-19 outbreak, and they intend to use their loans to maintain payroll, or retain employees during the term of the loan. Borrowers must additionally attest that they will not use the money to repay or refinance pre-existing loan debt, and that funds will not be used for stock buybacks. Limitations are also set on executive compensation and dividends.
The following restrictions under Section 4003(c)(3)(A)(ii) of the CARES Act apply to the Main Street Lending Program:
- Borrower will be prohibited from engaging in stock buybacks of nationally listed shares of the borrower or any of its parent entities, unless contractually obligated prior to enactment of the CARES Act, or from paying dividends or making other capital distributions with respect to common stock, until one year after the loan is no longer outstanding
- Borrower also will be prohibited from increasing the compensation of any employee whose compensation exceeded $425,000 in 2019 or from offering the employee significant severance or termination benefits until one year after the loan is no longer outstanding
- Borrower’s officers and employees whose total compensation exceeded $3 million in 2019 cannot receive compensation greater than $3 million, plus 50% of the amount over $3 million that the individual received in 2019 until one year after the loan is no longer outstanding
How to Apply for MSNLF or MSELF Loans
Contact your current lender directly to apply for either program. To apply for the expanded facility, borrowers will have to discuss expanding an existing loan and discuss collateral requirements with their current lender.
As of the date of this publication, the Main Street Lending Program is not yet active. Notices posted by the Federal Reserve suggest that the Federal Reserve and the Secretary of the Treasury may make adjustments to program terms. We expect to see more guidance in the coming days and will continue to monitor additional rules and regulations as they become available.