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The Fed’s Main Street Lending Program: Who’s Eligible?

Questions and Answers on the central bank’s $600 billion direct-loan program

The Federal Reserve announced the creation of new lending programs to help businesses that need access to cash because of the coronavirus pandemic.

The central bank said it will make as much as $600 billion in loans through the Main Street Lending Program, which consists of two different emergency-lending facilities. The Fed hasn’t attempted such a direct-lending program since the 1930s. Here’s a look at some frequently asked questions:

What types of businesses are eligible for the program?

The program is designed for businesses with as many as 10,000 employees or as much as $2.5 billion in 2019 revenues.

Will businesses apply directly to the government for loans?

No. The program isn’t operating yet, but when it is, businesses will work through banks to obtain loans.

How is this different from the Paycheck Protection Program?

The PPP is being administered through the Small Business Administration to provide forgivable loans for businesses with fewer than 500 employees, so that they can pay up to eight weeks of payroll costs.

Can small businesses use the Main Street Lending Program?

Yes. The Fed’s MSLP is designed to reach larger firms that aren’t able to obtain funding from the PPP, but small businesses—including those that participate in the PPP—are also able to seek loans from the MSLP.

Some very small businesses may decide it’s not attractive to use the MSLP because the minimum loan size is $1 million and the rates will be higher than on PPP loans.

How will the program work?

The Fed is creating two different lending facilities—one for new loans and one for existing loans. Businesses can obtain financing only from one of the two facilities.

Under the programs, an eligible bank will make a loan or reissue part of an existing loan with a maturity of no more than four years. Principal and interest payments can be deferred for a year. Loans will be priced using the adjustable Secured Overnight Financing Rate plus 2.5 to 4 percentage points, and there is also an upfront origination fee of 1 percentage point. Loans can be paid off early without a penalty.

How much can eligible businesses borrow?

For the new-loan facility, the maximum loan is $25 million or an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, doesn’t exceed four times the borrower’s 2019 earnings before interest, taxes, depreciation and amortization, whichever is less.

For the existing-loan facility, the maximum loan amount is the lesser of $150 million; or 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, doesn’t exceed six times the borrower’s 2019 earnings before interest, taxes, depreciation and amortization.

What other restrictions come with these loans?

Banks must attest that the proceeds of any loans won’t be used to repay or refinance pre-existing loans or lines of credit they’ve extended to the borrower. Borrowers must commit to refrain from using the proceeds of the new loan to repay other loan balances.

Borrowers must attest that they require financing due to challenges prompted by the coronavirus pandemic and that they will make reasonable efforts to maintain payroll and employees during the term of the loan.

Recipients cannot pay dividends or buy back stock during the course of the loan or for 12 months after it has been paid off due to restrictions Congress placed in the Cares Act, which provided funds the Treasury is using to backstop loans. Highly paid executives and officers are also prohibited from increasing the pay of any employee whose compensation exceeded $425,000 in 2019.

The Fed has created a separate facility for corporate-debt issuance by highly rated companies. Can borrowers use both programs?

No. Borrowers must choose between obtaining a new loan from the Main Street Lending Program or issuing a new security through the Primary Market Corporate Credit Facility.

Do loans under the Primary Market Corporate Credit Facility face the same restrictions on dividends, share repurchases and executive compensation?

No. Congress only applied those restrictions to “direct loans.” Fed officials have concluded that while the loans under the Main Street Lending Program fall under the definition of direct loan, the PMCCF is engaging in capital-markets transactions. In that facility, the Fed is purchasing corporate bonds as a sole investor, or it will buy portions of syndicated loans or bonds alongside other investors.

Where can I find other information about these programs?

The Fed has published the term sheets for the new-loan and existing-loan programs.

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