Federal Reserve Board Revamps Its Main Street Lending ProgramMay 1, 2020 – Alerts
On April 30, 2020, the Federal Reserve Board of Governors issued revised term sheets for its Main Street Lending Program, which is not yet operational. The Main Street Lending Program was authorized by the Coronavirus Economic Stabilization Act (CESA), in conjunction with the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and provides financial assistance to small- and medium-sized businesses coping with the pandemic.
A start date for the program “will be announced soon,” according to the Federal Reserve.
The prior version of the Main Street Lending Program, which was announced at the beginning of April, consisted of two types of loan facilities: the Main Street New Loan Facility (New Loan Facility) and the Main Street Expanded Loan Facility (Expanded Loan Facility). The new version adds a third loan facility, the Main Street Priority Loan Facility (Priority Loan Facility). In addition, the new version makes significant modifications to the prior loan facilities and allows for larger companies to borrow and larger loan amounts. It also provides for a lower interest rate.
The Main Street Lending Program is designed for companies that were relatively healthy prior to the pandemic. It is not intended to bail out companies that were suffering prior financial difficulties. By using a multiple of a company’s 2019 EBITDA as one of the measures used to calculate its maximum loan amount, the program severely limits the ability of companies with minimal 2019 EBITDA to benefit. Eligible borrowers may participate in only one of the Main Street Lending Facilities.
Who is Eligible?
The following businesses are eligible for a Main Street Loan:
- Most for-profit entities (with a few exceptions) that meet other eligibility requirements and were established prior to March 13, 2020.
- Entities that had fewer than 15,000 employees OR 2019 annual revenues of $5 billion or less.
- Entities that were created or organized in the U.S. under the U.S. law, with significant operations in and a majority of employees based in the U.S.
- Entities that have not received specific support under the CARES Act other than Paycheck Protection Program loans.
Where Do I Get a Loan Under the Main Street Lending Program?
Loans are available from any participating U.S. federally insured depository institution (i.e., a bank, savings association or credit union), a U.S. branch or agency of a foreign bank, a U.S. bank holding company, a U.S. savings and loan holding company, a U.S. intermediate holding company of a foreign banking organization or a U.S. subsidiary of any of the foregoing.
Unlike loans funded under the Paycheck Protection Program, the government is not guaranteeing 100% of the Main Street Lending loans. The Federal Reserve will guarantee 95% of the loans made under both the New Loan Facility and the Expanded Loan Facility and 85% of the loans made under the Priority Loan Facility. That means that banks will underwrite these loans more strictly than the paycheck protection loans.
What Are the Terms of the Available Loans?
The terms of the loans under each program are similar, with some variation, as follows:
- The maximum loan size for New Loans and Priority Loans is the lesser of either $25 million or an amount that, after adding outstanding and undrawn available debt, does not exceed four times 2019 EBITDA for New Loans and six times 2019 EBITDA for Priority Loans. The maximum loan amount for Expanded Loans is the lesser of
- (1) $200 million
- (2) 35% of existing, outstanding and undrawn available credit that is on equal footing in priority
- (3) an amount when added to the existing, outstanding and undrawn available debt, does not exceed six times 2019 EBITDA.
- (1) $200 million
- Four-year terms.
- Principal and interest payments are deferred for one year, with unpaid interest being capitalized at the end of one year. The balance of a New Loan is amortized one-third at the end of each of the next three years until paid in full. The balance of a Priority Loan or an Expanded Loan is amortized 15% at the end of the second year, 15% at the end of the third year, with a balloon payment of 70% at maturity at the end of the fourth year.
- The loans will bear interest at the rate of the one- or three-month LIBOR, plus 300 basis points.
- A New Loan cannot be contractually subordinated in terms or priority to any of the borrower’s other loans. A Priority Loan and the upsized tranche of an Expanded Loan must be senior or on equal footing in terms of priority and security with the borrower’s other loans, other than mortgage debt.
- There are no prepayment penalties.
- The loans are ineligible for forgiveness.
Why Are There Different Types of Loans?
New Loans and Priority Loans are for new loan credit facilities for a borrower. The Expanded Loans are for borrowers who have an existing line of credit with a lender who is willing to add a new tranche under the Expanded Loan Facility on top of their existing loan, in which case the terms stated below apply to the increased tranche. A Priority Loan can be of an amount that is greater than and has better amortization terms than the New Loan.
What Other Restrictions Apply to a Borrower?
During the term of the loan and for a period of 12 months after maturity, certain restrictions are placed on the borrower:
- A borrower is prohibited from purchasing its own publicly issued stock, if a public company, and from paying dividends or capital distributions.
- There are caps on compensation for executives who earn over $425,000 in compensation in 2019.
- A borrower must commit not to use the proceeds of the loan or upsized tranche to repay other loan balances.
- A borrower cannot repay other debt of equal or lower priority, with the exception of mandatory principal and interest payments, until it repays the Main Street Loan in full.
- A borrower must commit that it will not cancel or reduce any of its committed lines of credit with the bank or any other lender.
- A borrower must certify that 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.
- A borrower must make commercially reasonable efforts to maintain its payroll and retain its employees during the time the loan or the upsized tranche is outstanding.
What Fees Can Be Charged to a Borrower?
A borrower must pay an origination fee of 1% on New Loans, 0.75% on Priority Loans, and 1% on the upsized tranche of an Expanded Loan. In addition, the Federal Reserve will charge the lender a fee in the same amount, which the lender is allowed to pass on to the borrower.
When Can I Apply for My Loan?
The Federal Reserve stated in its April 30 release that it is currently working to create the infrastructure necessary to make the Main Street Lending Program operational. It is anticipated that lenders will gear up to make these loans shortly.