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Main Street Lending Program: What We Know as of April 30

Included in Section 4003 of the CARES Act, which was signed into law on March 27, 2020, was a reference to a Main Street Lending Program, to be established at the discretion of the Board of Governors of the Federal Reserve System (the Federal Reserve), to support lending to small and mid-sized businesses.

On April 9, 2020, the Federal Reserve announced they had authorized the establishment of a $600 billion Main Street Lending Program. In conjunction with the announcement, the Federal Reserve initially outlined two separate credit facilities under this program, the Main Street New Loan Facility (MSNLF) and the Main Street Expanded Loan Facility (MSELF). The terms and conditions of these credit facilities were subject to change and were open for public comments through April 16, 2020. On April 30, 2020 the Federal Reserve announced revised terms for these credit facilities along with a third credit facility, the Main Street Priority Loan Facility (MSPLF). The program is expected to launch during early May 2020.

The Department of the Treasury, using funds appropriated to the Exchange Stabilization Fund under section 4027 of the CARES Act, will make a $75 billion equity investment in the single common special purpose vehicle (SPV) in connection with this program. The SPV will purchase 95 percent participation in eligible loans under both MSNLF and MSELF to be originated by eligible lenders. Eligible lenders would retain 5 percent of each eligible loan under MSNLF and MSELF. The SPV will purchase 85 percent participation in eligible loans from eligible lenders under MSPLF and eligible lenders will retain 15 percent of each eligible loan.

The following preliminary terms and conditions, as revised on April 30, 2020, are outlined the term sheets for all three credit facilities:

  • Eligible lenders are a U.S. federally insured depository institution (including 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.
  • Eligible borrowers are businesses (defined as an entity that is organized for profit as a partnership; a limited liability company; a corporation; a trust; a cooperative; a joint venture with no more than 49 percent participation by foreign business entities; or a tribal business concern as defined) established prior to March 13, 2020, with up to 15,000 employees or up to $5 billion in 2019 annual revenues.
  • Ineligible businesses generally include businesses listed in 13 CFR 120.110.
  • Each eligible borrower must be a business that is created or organized in the U.S. or under the laws of the U.S. with significant operations in and a majority of its employees based in the U.S.
  • 4-year maturity.
  • Principal and interest payments deferred for one year (unpaid interest will be capitalized).
  • Interest rate – the adjustable rate of LIBOR (1 or 3 months) + 300 basis points.
  • Prepayment permitted without penalty.
  • Businesses may borrower under only one of these credit facilities, and would be precluded from doing so if they have a loan under the Primary Market Corporate Credit Facility. Businesses that have received the Paycheck Protection Program (PPP) loans are permitted to borrow under these facilities.

While many of the terms and conditions are similar between the three facilities as outlined above, there are certain terms that differ as follows:

  • Main Street New Loan Facility:
    • Minimum loan size of $500 thousand.
    • Maximum loan size 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 the Eligible Borrower’s adjusted 2019 earnings before interest, taxes, depreciation, and amortization (“EBITDA”).
    • 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 the end of the fourth year.
    • Loan cannot at the time of origination or at any time during the term of the loan be contractually subordinated in terms of priority to any other loans or debt instruments.
  • Main Street Expanded Loan Facility:
    • Minimum loan size of $10 million.
    • Maximum loan size that is the lesser of (i) $200 million, (ii) 35 percent of the Eligible Borrower’s existing outstanding and undrawn bank debt that is equivalent in secured status, or (iii) an amount that, when added to the Eligible Borrower’s existing outstanding and undrawn debt, does not exceed six times the Eligible Borrower’s 2019 adjusted earnings before interest, taxes, depreciation, and amortization (“EBITDA”).
    • Principal amortization of 15 percent at the end of the second year, 15 percent at the end of the third year, and a balloon payment of 70 percent at the end of the fourth year.
    • At the time of upsizing, and at all times, the upsized tranche is outstanding, the loan will be senior to or pari passu with, in terms of priority and security, the eligible borrowers’ other loans or debt instruments, other than mortgage debt.
  • Main Street Priority Loan Facility:
    • Minimum loan size of $500 thousand.
    • Maximum loan size that is the lesser of (i) $25 million or (ii) an amount that, when added to the Eligible Borrower’s existing outstanding and undrawn debt, does not exceed six times the Eligible Borrower’s 2019 adjusted earnings before interest, taxes, depreciation, and amortization (“EBITDA”).
    • Principal amortization of 15 percent at the end of the second year, 15 percent at the end of the third year, and a balloon payment of 70 percent at the end of the fourth year.
    • At the time of origination, and at all times, the eligible loan is outstanding, the loan will be senior to or pari passu with, in terms of priority and security, the eligible borrowers’ other loans or debt instruments, other than mortgage debt.

Unlike PPP loans, loans made under the Main Street Lending program are not eligible for any debt forgiveness. Additionally, there are several required certifications and covenants for both lenders and borrowers as presented in the draft term sheets. These are outlined as follows:

  • MSNLF, MSELF, MSPLF – The eligible lender must commit that it will not request that the eligible borrower repay debt extended by the eligible lender to the eligible borrower, or pay interest on such outstanding obligations, until the eligible loan (or upsized tranche, as applicable) is repaid in full unless the debt or interest payment is mandatory and due, or in the case of default and acceleration.
  • MSNLF - The eligible borrower must commit to refrain from repaying the principal balance of, or paying any interest on, any debt until the eligible loan is repaid in full unless the debt or interest payment is mandatory and due.
  • MSELF - The eligible borrower must commit to refrain from repaying the principal balance of, or paying interest on, any debt until the upsized tranche of the eligible loan is repaid in full unless the debt or interest payment is mandatory and due.
  • MSPLF - The eligible borrower must commit to refrain from repaying the principal balance of, or paying any interest on, any debt until the eligible loan is repaid in full unless the debt or interest payment is mandatory and due. However, the eligible borrower may, at the time of origination of the loan, refinance existing debt owed by the eligible borrower to a lender that is not the eligible lender.
  • MSNLF, MSELF, MSPLF - The eligible lender must commit that it will not cancel or reduce any existing committed lines of credit outstanding to the eligible borrower, except in an event of default. The eligible borrower must commit that it will not seek to cancel or reduce any of its committed lines of credit with the eligible lender or any other lender.
  • MSNLF, MSELF, MSPLF - The eligible borrower must certify that it has a reasonable basis to believe that, as of the date of origination or upsizing of the eligible loan and after giving effect to such 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.
  • MSNLF, MSELF, MSPLF - The eligible lender must certify that the methodology used for calculating the eligible borrower’s adjusted 2019 EBITDA for the leverage requirement outlined above is consistent with the methodology it has previously used for adjusting EBITDA when extending credit or originating or amending loans to borrowers on or before April 24, 2020.
  • MSNLF, MSELF, MSPLF - The eligible borrower must commit 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, except that an S corporation or other tax pass-through entity that is an eligible borrower may make distributions to the extent reasonably required to cover its owners’ tax obligations in respect to the entity’s earnings.
  • MSNLF, MSELF, MSPLF - Eligible lenders and eligible borrowers will each be required to certify that the entity is eligible to participate in the facility, including in light of the conflicts of interest prohibition in section 4019(b) of the CARES Act.

There are also certain fees that borrowers and lenders may be subject to as highlighted in the term sheets, and the program is tentatively scheduled to end on September 30, 2020. We will continue to provide updates as the details of this program are finalized. Please reach out to our Bonadio CARES & More Team today with any questions.

The information and advice we are providing for this matter relates to COVID-19 legislative relief measures. Because legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that could modify some of the advice and information provided to you, after the conclusion of our engagement. We therefore make no warranties, expressed or implied, on the services provided hereunder.