The Treasury Department and the Federal Reserve Board Provide Additional Details on the Main Street Business Lending Program Providing Up to $600 Billion to Medium-Sized Businesses

(Updated 05.11.2020)

This alert summarizes the term sheets pertaining to the Main Street Business Lending Program that the Federal Reserve Board published on April 8, 2020, and the expansion of the program and updated guidance, including the FAQs published on April 30, 2020. As discussed below, this robust program provides financing for companies that may have otherwise been excluded from previous government stimulus financing; however, the updated guidance provides that the SBA affiliation rules will now apply to the eligibility requirements for borrowers.

Facilities Under the Main Street Business Lending Program

• Main Street New Loan Facility (“MSNLF”) – Eligible Loans that originated after April 24, 2020
• Main Street Expanded Loan Facility (“MSELF”) – Eligible Loans that originated before April 24, 2020 and have a remaining maturity of at least 18 months and have been subsequently upsized
• Main Street Priority Loan Facility (“MSPLF”) – Eligible Loans that originated before April 24, 2020.

Under these programs, the Federal Reserve Bank of Boston will commit to lend to a single common special purpose vehicle (“SPV”). Using funds appropriated under the CARES Act, the SPV will be funded with $75 billion of equity capital from the Treasury Department. The combined size available for the facilities will be up to $600 billion.

Like the Payroll Protection Program (“PPP”) loans, these loans will be provided directly to Eligible Borrowers by Eligible Lenders. The Federal Reserve (through the SPV) will purchase a high percentage of the aggregate principal amount of these loans – 95% of the aggregate principal amount of Eligible Loans under the MSNLF or MSELF with Eligible Lenders retaining 5% and 85% of the aggregate principal amount of Eligible Loans under the MSPLF with Eligible Lenders retaining 15%. Purchases will be made by the SPV until September 30, 2020, unless otherwise further extended by the Federal Reserve and Treasury Department.

Eligible Borrowers

Borrowers under these facilities must meet the following criteria:

• Businesses established prior to March 13, 2020;
• Businesses up to 15,000 employees or up to $5 billion in 2019 annual revenues (subject to the SBA Affiliation rules);
• Businesses created or organized in the United States or under the laws of the United States with significant operations in and a majority of its employees based in the United States;
• Is not an Ineligible Business (as listed in 13 CFR 120.110(b)-(j) and (m)-(s), as modified by Section 1102 of the CARES Act); and
• Businesses that have not otherwise received specific support pursuant to the CARES Act.

Businesses may only participate in one of the three Main Street Business Lending Programs and may not also have participated in the Primary Market Corporate Credit Facility. Borrowers that have obtained loans under the PPP program are eligible to participate.  

As noted above, the SBA Affiliation Rules are applicable for purposes of determining whether a business has 15,000 employees or revenues of $5 billion or less. The business must aggregate the employees and 2019 revenue of its business with any such affiliates in accordance with the SBA’s affiliation rules set forth in 13 CFR 121.301(f) (including potentially foreign affiliates); however there are currently no hard limits on foreign ownership of the U.S. entity.

Eligible Lenders

As noted, borrowers will seek these loans directly from Eligible Lenders. Currently, Eligible Lenders under the program are limited to U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies, including in each case, U.S. branches or agencies of foreign banking institutions. Direct non-bank lenders were not included in the definition of Eligible Lenders, but it was made clear that for purposes of determining eligibility of a loan under the MSELF or MSPLF programs, existence of a non-bank financial institution participant would not otherwise preclude the loan, so long as the Eligible Loan under such programs is provided by an Eligible Lender.

Eligible Loans

Loans under the program must meet the below criteria.

Main Street New Loan Facility Eligible Loans

• Originated after April 24, 2020;
• Unsecured or secured term loan;
• Four year maturity;
• Principal and interest payments deferred for one year (with unpaid interest capitalizing during such deferral);
• Interest rate of LIBOR (1 or 3 month) plus 300 basis points;
• Principal amortization of one-third at the end of the second year, one-third at the end of the third year, and one-third at maturity at the end of the fourth year;
• Minimum loan size of $500,000;
• Maximum loan size: the lesser of (i) $25 million or (ii) an amount that, when added to the Eligible Borrower’s existing outstanding and undrawn available debt, does not exceed four times such borrower’s 2019 Adjusted EBITDA;
• No prepayment penalties.

Main Street Expanded Loan Facility Eligible Loans

• Originated before April 24, 2020 (and upsized thereafter) and must have a remaining maturity of at least 18 months;
• Term loan;
• Security – the upsized tranche must be senior to or pari passu with the borrower’s other loans and debt (other than mortgage debt);
• Four year maturity;
• Principal and interest payments deferred for one year (with unpaid interest capitalizing during such deferral);
• Interest rate of LIBOR (1 or 3 month) plus 300 basis points;
• Principal amortization of 15% at the end of the second year, 15% at the end of the third year, and a balloon payment of 70% at the end of the fourth year;
• Minimum loan size of $10 million;
• Maximum loan size: the least of (i) $200 million, (ii) 35% of the Eligible Borrower’s existing outstanding and undrawn available debt that is pari passu in priority with the Eligible Loan and equivalent in secured status, or (iii) an amount that, when added to the Eligible Borrower’s existing outstanding and undrawn available debt, does not exceed six times such borrower’s 2019 Adjusted EBITDA;
• No prepayment penalties.

Main Street Priority Loan Facility Eligible Loans

• Originated before April 24, 2020;
• Term loan;
• Security – Eligible Loan must be senior to or pari passu with, the Eligible Borrower’s other loans or debt (other than mortgage);
• Usage – at the time of origination of the loan, the borrower may use the proceeds to refinance existing debt owed by the borrower to a lender that is not an Eligible Lender;
• Four year maturity;
• Principal and interest payments deferred for one year (with unpaid interest capitalizing during such deferral);
• Interest rate of LIBOR (1 or 3 month) plus 300 basis points;
• Amortization of 15% at the end of the second year, 15% at the end of the third year, and a balloon payment of 70% at maturity at the end of the fourth year;
• Minimum loan size of $500,000;
• Maximum loan size: the lesser of (i) $25 million or (ii) an amount that, when added to the Eligible Borrower’s existing outstanding and undrawn available debt, does not exceed six times such borrower’s 2019 Adjusted EBITDA;
• No prepayment penalties.

Adjusted EBITDA Clarifications

For purposes of determining the maximum loan size, the Federal Reserve has clarified that lenders may calculate Adjusted EBITDA using “the methodology it has previously used for adjusting EBITDA when extending credit to the eligible borrower or similarly situated borrowers on or before April 24, 2020.” This would take into account negotiated addbacks beyond interest, taxes, depreciation and amortization. Companies with negative EBITDA were not specifically addressed and are currently excluded from the Main Street Lending Program (including nonprofits); however, the updated guidance did leave open the possibility that (i) the reliance on EBITDA will be revisited with respect to asset-based borrowers, given that EBITDA is not the main metric used in determining credit risk and (ii) adjusting the eligibility criteria specifically for nonprofits.

Existing Leverage Clarifications

The updated guidance clarified that a borrower’s “existing outstanding and undrawn available debt” includes all amounts borrowed under any loan facility, including unsecured or secured loans from any bank, non-bank financial institution or private lender, as well as any publicly issued bonds or private placement facilities. It also includes all unused commitments under any loan facility, excluding (i) any undrawn commitment that serves as a backup line for commercial paper issuance, (ii) any undrawn commitment that is used to finance receivables (including seasonal financing of inventory), (iii) any undrawn commitment that cannot be drawn without additional collateral, and (iv) any undrawn commitment that is no longer available due to change in circumstance. Existing outstanding and undrawn available debt should be calculated as of the date of the loan application.

Restrictions on Prepayment of Other Debt

Proceeds of Eligible Loans under the MSNLF and MSELF may not be used to refinance other debt; however, proceeds of an Eligible Loan under the MSPLF may be used to refinance other debt at the time of origination, provided that such debt is not held by the lender making the Eligible Loan. Under all three programs, the borrower is permitted to pay required principal and interest payments of other debt while the loan is outstanding and repay a line of credit consistent with the borrower’s normal course of business usage. Additionally, repayment may be requested by a lender of other existing debt in the event of a default or acceleration.

Additional Criteria for Eligible Loans

Certain attestations by the lender and borrowers are required in connection with the loans for such loan to be deemed an “Eligible Loan” under the program.

Lender Attestations

• Must commit to not requesting that the borrower repay or refinance preexisting loans or lines of credit made by such lender to the borrower, absent mandatory payments or in the case of default and acceleration;
• Will not cancel or reduce any existing lines of credit outstanding to the Eligible Borrower, except in the case of default;
• Must certify the methodology used in calculating the 2019 Adjusted EBITDA; and
• Must certify it is eligible to participate in such facility, including without limitation the conflicts of interest prohibition discussed more fully below.

Borrower Attestations

• Other than with respect to loans under MSPLF, the borrower must commit to refrain from repaying other debt of equal or lower priority, with the exception of mandatory principal payments, unless the Eligible Loan has first been repaid in full;
• The borrower will not seek to cancel or reduce any of its outstanding lines of credit with the Eligible Lender or any other lender;
• 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;
• Must certify that it has a reasonable basis to believe that, as of the date of the Eligible Loan and after giving effect to such loan, the borrower has the ability to meet its financial obligations for at least the next 90 days and does not expect to file for bankruptcy during such period; and
• Must certify it is eligible to participate in such facility, including without limitation the conflicts of interest prohibition discussed more fully below.

Retaining Employees

Each participating borrower should make commercially reasonable efforts to maintain its payroll and its employees while any such Eligible Loan is outstanding. The FAQs clarified that a borrower should undertake “good-faith efforts” to maintain payroll and employees “in light of its capacities, the economic environment, its available recourses, and the business need for labor.” Borrowers that have otherwise already laid off or furloughed employees as a result of the global pandemic are not otherwise precluded from applying for loans under the Main Street Lending programs.

Additional Detail Regarding Borrower Restrictions

In connection with the required borrower attestations, borrowers under the Main Street Lending Program are subject to restrictions set forth in section 4003(c)(3)(A)(ii) and section 4019(b) of the CARES Act.

Section 4003(c)(3)(A)(ii)

• During the term of the loan and for the 12-month period following the repayment of such loan, recipients may not pay dividends or buy back stock. The updated guidance clarified that such restriction will 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.
• During the term of the loan and for two years after repayment thereof, the company may not outsource or off-shore any jobs;
• During the term of the loan and for two years after repayment thereof, the company will not abrogate any existing collective bargaining agreement.
• During the term of the loan, the company must remain neutral in any union effort to organize its employees.
• During the term of the loan and for the 12-month period following the repayment of such loan, the following compensation restrictions shall apply:
  • Employees with compensation in excess of $425,000 in 2019, may not receive (i) a raise or (ii) severance pay or benefits that would exceed twice their 2019 compensation.
  • Executives with compensation in excess of $3 million in 2019, may not receive total compensation that exceeds $3 million plus 50% of the amount over $3 million in 2020.

Section 4019(b) – Conflicts of Interest Prohibition

Any entity in which the President, Vice President, head of an Executive department, or a Member of Congress (each, an “official”), or any spouse, child, son-in-law or daughter-in-law of any such person (each, a “family member”), holds 20% or more (by vote or value) of the outstanding amount of any class of equity interest (including shares, LLC or LP capital interests, profits interests, warrants or options to purchase, sell or subscribe) in such entity are ineligible for transactions under the Main Street Lending Program. For purposes of this determination, ownership amounts of an official and such official’s family members are aggregated.

Fees

• Loan Origination: Borrowers will be required to pay to lenders, an origination fee of 100 basis points on the principal amount of an Eligible Loan under the MSNLF or MSPLF and an origination fee of up to 75 basis points on the principal amount of an upsized Eligible Loan under the MSELF.
• Participation Related Fees: For Eligible Loans under the MSNLF or MSPLF, lenders will pay the SPV a fee of 100 basis points on the principal amount of the loan participation purchased by the SPV (i.e., 95% or 85% as applicable, of the par value of the loan). For upsized loans under the MSELF, Lenders will pay the SPV a fee of 75 basis points on the principal amount of the loan participation purchased by the SPV (i.e., 95% of the par value of the loan). These fees may be passed through by the lender to the borrower.
• Loan Servicing: The Federal Reserve (through the SPV) will pay lenders 25 basis points per annum on the principal amount of its participation in either the new or upsized loan for administering the loan.

Considerations

Companies seeking to take advantage of the Main Street Lending Program should closely consider all three facilities and also review their existing financing arrangements to determine what would need to be amended or waived in order to permit either a new or upsized loan. In addition to reviewing financial covenants, companies should review covenants relating to incurrence of debt and covenants prohibiting negative pledges or restrictive agreements, given that all the loans under this program restrict in certain ways the borrower’s ability to repay other debt of equal or lower priority while a Main Street Lending Program loan is outstanding. Unlike the PPP loans, these loans will be subject to a lender’s standard underwriting, so companies interested in these facilities should begin conversations with Eligible Lenders now in advance of the application being released.

This First Alert was originally published on April 10, 2020, and was updated on May 11, 2020.

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