The Federal Reserve Board recently announced changes to its new ‘Main Street Lending Program’ (MSLP), created to help small to medium-sized businesses that need access to cash because of the coronavirus pandemic.
The MSLP provides a $600 billion fund to eligible businesses to maintain operations and payroll until conditions normalize. This program is especially attractive to taxpayers that were too large to qualify for the Small Business Administration’s Paycheck Protection Program (PPP). Unlike the PPP, there is no potential debt forgiveness portion, but like the PPP, banks and other authorized lenders will be administering the program. Recipients of the PPP funds may also apply for the MSLP.
Background
On April 9, 2020, the Treasury Department and the Federal Reserve, acting under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), announced the creation of a new Main Street Lending Program under the Federal Reserve’s Section 13(3) emergency lending authority. On April 30, 2020, after receiving public feedback on potential refinements, the Federal Reserve Board announced an expansion of the scope, terms, and eligibility for the MSLP.
Both the Main Street New Loan Facility and the Priority Loan Facility will finance loans originated on or after April 24 and the Expanded Loan Facility will finance additional credit on loans originated on or before April 24. Borrowers can only participate in one of the facilities.
How to Determine Eligibility:
Borrowers must meet the following requirements in order to be eligible under the MSLP:
- Must have 15,000 or fewer employees or 2019 annual revenues of $5 billion or less.
- The number of employees is determined by the average total number of employees for each pay period during the 12 months prior to origination. It includes full-time, part-time, seasonal, or otherwise employed individuals. Borrowers should count its own employees and those of affiliates.
- Borrowers can choose between two tests of 2019 revenue: 1) 2019 GAAP revenue reflected on audited financial statements or 2)2019 receipts reported on 2019 federal tax return. Borrower must aggregate its revenue with its affiliates.
- Must have been established prior to March 13, 2020.
- Must be a for-profit entity, created or organized in the U.S. or under U.S. law with significant operations and a majority of employees in the U.S.
- Must not be a business ineligible for an SBA Loan (with some exceptions).
- Must have not received specific support pursuant to the CARES Act; however, businesses that have received loans under the Paycheck Protection Program (“PPP”) are permitted.
When first announced, the Board indicated that these loans are intended to support businesses that were in good financial standing before the crisis and require these funds to continue operations, maintain payroll, and retain workers. The press release on April 30th indicated that a separate approach will be evaluated to meet the needs of nonprofit organizations.
The following entities are eligible as lenders under the MSLP:
- U.S. federally-insured depository institutions (including banks, savings associations, and credit unions)
- U.S. branches or agencies of foreign banks
- U.S. bank holding companies
- U.S. savings and loan holding companies
- U.S. intermediate holding companies of foreign banking organizations
- Any U.S. subsidiary of any of the foregoing
Terms of the Program
The MSLP now offers three options, increased from two:
- The Main Street New Loan Facility (New Loan)
- The Main Street Priority Loan Facility (Priority Loan)
- The Main Street Expanded Loan Facility (Expanded Loan)
All loan facilities share the same eligible borrower criteria, maturity, interest rate, deferral of principal and interest for one year, and ability of the borrower to prepay without penalty. The primary differences between the options relate to maximum loan sizes and how the loan interacts with existing outstanding debt. The Priority Loan includes a modification to allow the Borrower to refinance existing debt owed to a lender at the time the loan is originated, and the Expanded Loan necessarily includes an existing loan from the Lender.
Loan Terms:
| New Loan Facility | Expanded Loan Facility (solely with respect to the Upsized Tranche) | Priority Loan Facility | |
| Origination | After April 24 | On or before April 24 and has remaining maturity of at least 18 months (taking into account any adjustments made at the maturity of the loan after April 24, 2020, including at time of upsizing) | After April 24 |
| Security | Can be secured or unsecured | If original loan is secured, extension secured on a pari passu basis with original loan. If original loan is unsecured, extension is unsecured. | Can be secured or unsecured |
| Maturity | 4 years | 4 years | 4 years |
| Payment | Principal and interest payments deferred for one year (unpaid interest will be capitalized). 33.33% due each year on years 2-4. | Principal and interest payments deferred for one year (unpaid interest will be capitalized). 15% due on year two, 15% due on year three, and 70% due on year four. | Principal and interest payments deferred for one year (unpaid interest will be capitalized). 15% due on year two, 15% due on year three, and 70% due on year four. |
| Interest Rate | LIBOR + 3% | LIBOR + 3% | LIBOR + 3% |
| Minimum Loan Size | $500,000 | $10 million | $500,000 |
| Maximum Loan Size | The lesser of (i) $25 million or (ii) an amount that, when added to the Borrower’s existing outstanding and undrawn available debt, does not exceed four times the Borrower’s adjusted 2019 EBITDA | The lesser of (i) $200 million, (ii) 35% of the Borrower’s existing outstanding and undrawn available debt that is pari passu in priority with the loan and equivalent in secured status, or (iii) an amount that, when added to the Borrower’s existing outstanding and available debt, does not exceed six times the Borrower’s adjusted 2019 EBITDA | The lesser of (i) $25 million or (ii) an amount that, when added to the Borrower’s existing outstanding and undrawn available debt, does not exceed six times the Borrower’s adjusted 2019 EBITDA |
| Prepayment | Prepayment permitted without penalty | Prepayment permitted without penalty | Prepayment permitted without penalty |
| Priority | At the time of origination and at any time the loan is outstanding, it must not be contractually subordinated in terms of priority to any of the borrower’s other loans or debt instruments. | At the time of upsizing and at all times the upsized tranche is outstanding, it must be senior or pari passu in terms of priority and security to the borrower’s other loans or debt instruments (other than mortgage debt). | At the time of origination and at any time the loan is outstanding, it must be senior or pari passu in terms of priority and security to the borrower’s other loans or debt instruments (other than mortgage debt). |
Fees:
For both the New Loan Facility and the Priority Loan Facility, the borrower will pay a transaction fee up to up to 100 basis points of the principal amount of the loan at the time of origination. For the Expanded Loan Facility, the borrower will pay a transaction fee up to 75 basis points of the principal amount of the upsized tranche of the loan.
What Certifications are Required?
- Refrain from using proceeds of eligible loans to repay any other loans, unless a payment is mandatory and due. However, for loans issued under the Priority Loan Facility, the borrower may, at the time of origination, refinance existing debt owed to another lender.
- Commit that it will not seek to cancel/reduce any outstanding credit lines.
- Certify that it has a reasonable basis to believe that as of the date or the loan (and after giving effect to the loan) it will be able to meet its obligations for at least the next 90 days and does not expect to file for bankruptcy in that time period.
- Commit that it will follow the one-year post-repayment restrictions on compensation, share repurchases, and capital distributions set forth in the CARES Act (except that S Corporations or other tax pass-through entities may make distributions to the extent reasonably required to cover equity holder tax obligations in respect of the entity’s earnings).
- Certify that it is eligible to participate in the MSLP, including compliance with conflicts of interest prohibitions contained in the CARES Act.
- Commit to use commercially reasonable efforts to maintain payroll and retain employees.
Other Considerations:
The MSLP facilities contain the same affiliation tests used for the PPP loans. Under these tests, entities are affiliates if one controls or has power to control the other or when a third party controls or has power to control both. For the MSLP loans, the maximum number of employees is significantly greater, which may make this a viable alternative for these companies that were excluded from PPP.
However, the MSLP loans are not without their challenges, and the terms are much less favorable than the PPP loans. Before pursuing a MSLP loan, borrowers should also consider the relatively short maturity of the loan of four years and the significant annual payments that are required under each facility.
We Are Here to Help
We are following MSLP developments closely. The Warady & Davis LLP team will continue to provide relevant updates and guidance on this topic and others. Please visit the Warady & Davis LLP COVID-19 Resource Center for a wealth of information on stimulus assistance, new legislation and much more. Please do not hesitate to reach out to us with any questions or concerns at 847-267-9600 or info@waradydavis.com.
Legal Notice: The materials communicated in this transmission are for informational purposes only and not for the purpose of providing accounting, legal or investment advice. You should contact your accountant or advisor to obtain advice with respect to any particular issue or problem. Use of and access to this Web site or any of the e-mail links contained within the site do not create an accountant-client relationship between Warady & Davis and the user or browser. You should not act upon any such information without first seeking qualified professional counsel on your specific matter. Any accounting, business or tax advice contained in this communication is not a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, Warady & Davis would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services. © 2020 All Rights Reserved.