The Main Street Lending Program: The Latest COVID-19 Relief Effort

Daniel F. Rahill, CPA, JD, LL.M., CGMA

How small and mid-sized business can tap this $600 billion supply of credit.

Responding to the COVID-19 outbreak, on April 9 the Federal Reserve Board announced details on several new lending facilities created by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), including the Main Street Lending Program. 

While the Small Business Administration’s Paycheck Protection Program (“PPP”) and Economic Injury Disaster Loan Program were aimed at smaller businesses, the Main Street Lending Program was established to purchase up to $600 billion in loans from eligible lenders to support lending to small and medium-sized businesses.

On April 30, 2020, following a period of public comment, the Federal Reserve Board published additional guidance and revisions to its Main Street Lending Program expanding its scope and eligibility.  The new guidance updates the Program as follows:

  • Creates a third and new loan option, the Main Street Priority Loan Facility
  • Lowers the minimum loan amount from $1,000,000 to $500,000 for certain loans
  • Expands the pool of eligible borrowers to include businesses with up to 15,000 employees and up to $5 billion in 2019 annual revenues, up from 10,000 employees and $2.5 billion in 2019 annual revenues originally announced
  • Clarifies that Small Business Administration (“SBA”) affiliation rules applicable to Paycheck Protection Program loans will apply in determining eligibility for the Main Street Program
  • Provides that certain businesses that are ineligible for a loan under the Paycheck Protection Program are also ineligible for a loan under the Main Street Program

Main Street Loan Facilities

The Main Street Program includes three types of loans: the Main Street New Loan Facility (“MSNLF”); the Main Street Priority Loan Facility (“MSPLF”); and the Main Street Expanded Loan Facility (“MSELF”). 

The facilities share a number of features, including the eligibility criteria for borrowers and lenders, maturity, interest rate, deferral of principal and interest for one year, and ability of the borrower to prepay without penalty, but have other differences, including with respect to the level of pre-crisis indebtedness of an eligible borrower. A summary of these differences is shown in the table below:

Main Street New Loan Facility

Loan sizes for new Main Street loans (“New Loans”) will range from a minimum principal amount of $500,000 up to a maximum principal amount that is the lesser of (i) $25 million or (ii) an amount that, when added to the borrower’s existing outstanding and undrawn available debt, is less than or equal to four times the borrower’s 2019 adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”).

The methodology used by lenders to calculate adjusted 2019 EBITDA must be the methodology such lender has previously used when extending credit to an applicable borrower or similarly situated borrowers on or before April 24, 2020.

New Loans may not be, at the time of origination and during the term of the loan, junior in priority in bankruptcy to the borrower’s other unsecured loans or debt instruments.

Main Street Priority Loan Facility

Loan sizes for new Main Street priority loans (“Priority Loans”) will range from a minimum principal amount of $500,000 up to a maximum principal amount that is the lesser of (i) $25 million or (ii) an amount that, when added to the borrower’s existing outstanding and undrawn available debt, is less than or equal to six times the borrower’s adjusted 2019 EBITDA.

At the time of origination and at all times thereafter, a Priority Loan must be either senior to (or pari passu), or equal ranking with the borrower’s other non-mortgage loans or debt instruments in terms of priority and security. The borrowers may, at the time of origination of a Priority Loan, refinance existing debt owed by the borrower with a lender that is not the eligible lender under the Main Street Program.

Main Street Expanded Loan Facility

The maximum size for the upsized tranche of any existing loans (“Expanded Loans”) will range from a minimum principal amount of $10 million up to a maximum principal amount that is the lesser of (i) $200 million, (ii) 35% of the borrower’s existing outstanding and undrawn available debt that is pari passu or equal ranking in priority with the loan and equivalent in secured status (i.e., secured or unsecured) or (iii) an amount that, when added to the borrower’s existing outstanding and undrawn available debt, is less than or equal to six times the borrower’s adjusted 2019 EBITDA.

To be eligible for “upsizing,” the existing term loan or revolving credit facility must have been originated on or before April 24, 2020, and must have a remaining maturity of at least 18 months. The lender may extend the maturity of an existing loan or revolving credit facility at the time of upsizing in order for the underlying instrument to satisfy the 18-month remaining maturity requirement.

At the time of upsizing and at all times thereafter, the Expanded Loan must be either senior to (or pari passu), or equal ranking with the borrower’s other non-mortgage loans or debt instruments in terms of priority and security.

Other Terms

All Main Street loans may be prepaid without penalty and will be subject to an adjustable interest rate of 1- or 3- month LIBOR + 3%. Amortization on Main Street loans will be deferred for one year and no payments of principal or interest will be due during this period. Unpaid interest will be capitalized.

New Loans and Priority Loans may be secured or unsecured. An Expanded Loan must be secured if the underlying loan is secured. In such case, any collateral securing the underlying loan (at the time of upsizing or on any subsequent date) must secure the Expanded Loan on a pro rata basis, and, if the borrower defaults, the Main Street Program and lender(s) would share equally in any collateral available to support the loan relative to their proportional interests in the loan. The lenders can require borrowers to pledge additional collateral to secure an Expanded Loan as a condition of approval.

Unlike the popular PPP loans, Main Street loans will not be eligible for loan forgiveness. Borrowers of New Loans and Priority Loans will pay an origination fee to the lender of 1% of the principal amount of the applicable loan. Borrowers of the Expanded Loans will pay an “upsizing” fee to the lender of 0.75% of the principal amount of the Expanded Loan. Additionally, the lenders will be required to pay the Main Street Program a transaction fee of 1% of the principal amount of any New Loan or Priority Loan, or 0.75% of the principal amount of the Expanded Loan, at the time of origination or upsizing, as applicable, and may elect to pass this fee on to the borrower.

The Main Street Program will cease participations on September 30, 2020 unless extended by the Treasury Department and the Fed.

Borrower Eligibility

Following are the criteria for eligibility for U.S. businesses to borrow from the Main Street Loan Program:

  • Must either have 15,000 employees or fewer, or had 2019 revenues of $5 billion or less.
  • In calculating the number of employees to determine eligibility, borrowers must count full-time, part-time, seasonal and other employees, and are to exclude volunteers and independent contractors.
  • In calculating 2019 annual revenues, either annual revenues per 2019 GAAP audited financials or receipts for fiscal year 2019 as reported to the Internal Revenue Service may be used.
  • Must have been created or organized prior to March 13, 2020 and been in good financial standing before the COVID-19 crisis are eligible to obtain a Main Street loan if (together with their affiliates). 
  • Must have significant operations in – and a majority of employees based in – the United States.
  • Must not be an Ineligible Business as modified and clarified on or before April 24, 2020 by SBA regulations for purposes of the PPP. Such Ineligible Businesses include, among others, banks, life insurance companies, and most government-owned entities. Businesses, such as airline carriers, that received support pursuant to Section 4003(b)(1)-(3) of the CARES Act, likewise are ineligible to participate in the Main Street Program.
  • In addition, companies that have taken advantage of the PPP may obtain both a PPP loan and a Main Street loan. However, businesses will only be eligible under the Main Street Lending Program to obtain one of the Main Street loans and must not also participate in the Fed’s Primary Market Corporate Credit Facility, which will purchase corporate bonds from eligible issuers.

While SBA affiliation rules will apply to Main Street loans for purposes of determining whether the number of employees and/or 2019 revenues of the borrower business, a number of businesses (including, in some cases, private equity- and venture capital-owned firms) that were ineligible for PPP loans should be able to participate in the Main Street Lending Program, provided they satisfy other eligibility requirements, including the leverage restrictions described above. Additionally, much of the real estate industry should be able to participate in the Main Street Lending Program.

Non-profit entities continue to be ineligible for Main Street loans. The Fed, however, acknowledged the unique needs of non-profit organizations and indicated that the Fed and the Treasury Department will be evaluating the feasibility of adjusting the borrower eligibility criteria and loan eligibility metrics of the Main Street Program for non-profit entities.

Borrower Certifications

Various borrower certifications will be required in connection with each Main Street loan, including the following:

  • The borrower will not use the proceeds of the loan to repay principal or interest on any other debt (other than mandatory principal or interest payments that are due, or, in the case of Priority Loans, debt owed to a lender other than the Priority Loan lender refinanced at the time of the origination of the loan) until the Main Street loan is fully repaid.
  • The borrower will not seek to cancel or reduce any of its committed lines of credit.
  • The borrower has a reasonable basis to believe that, as of the date of origination or upsizing, as applicable, 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.
  • The borrower 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 a borrower may make distributions to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings).
  • Compensation restrictions:  For officers that made over $425,000 in 2019, borrowers may not, beginning the year of the loan and continuing for the one-year period following the satisfaction of the loan, pay an officer more compensation than that officer received in 2019 or pay severance/other benefits that exceed twice the maximum total compensation in 2019. For officers that made over $3 million in 2019, borrowers may not, beginning the year of any loan and continuing for the one-year period following the satisfaction of the loan, pay an officer more than $3 million plus 50% of the amount over $3 million received by the officer in 2019.
  • Stock repurchase/capital distributions prohibitions:  Borrowers with direct loans cannot, absent a waiver from the Fed, engage in stock buybacks, unless required under pre-existing contracts, or pay dividends or make other capital distributions, until one year after the date the Main Street loan is no longer outstanding, subject to the exception with respect to S-corporations or other pass-through entities.
  • The borrower is eligible to participate in the Main Street Lending Program, and is in compliance with the conflicts of interest prohibition in section 4019(b) of the CARES Act (“Conflicts of Interest Prohibition”).     Such a disqualifying conflict would exist where a businesses in which the President, Vice President, an executive department head, Member of Congress ,or such individual’s spouse, child (including adult children), son-in-law, or daughter-in-law, own at least a 20% direct or indirect equity stake.  These businesses will not be eligible for emergency relief funds under Title IV of the CARES Act, including Main Street Lending Program funds.
  •  

The Fed indicated that each borrower that participates in the Main Street Program should make commercially reasonable efforts to maintain its payroll and retain its employees during the term of the loan. The Fed further clarified, in its Main Street Program Frequently Asked Questions, published on April 30, 2020, that a borrower should undertake good-faith efforts to maintain payroll and retain employees, in light of its capacities, the economic environment, its available resources, and the business need for labor. Borrowers that have already laid-off or furloughed workers as a result of the disruptions from COVID-19 remain eligible to apply for Main Street loans.

Eligible Main Street Lenders

Eligible lenders under the Main Street Lending Program are U.S. insured depository institutions, U.S. bank holding companies, and US savings and loan holding companies.  

Lenders will be required to retain (until the earlier of maturity or until the Main Street Program sells all of its participation), with respect to New Loans or Expanded Loans, a 5 percent share of such loan, and with respect to Priority Loans, a 15 percent share of such loan, and sell the remaining percent of the applicable loan to the Main Street Program.

The Main Street Program and the applicable lenders would share in any losses on the Main Street loans on a pari passu, or senior, basis.

The Main Street Program will pay eligible lenders 0.25% of the principal amount of the participation in eligible Main Street loans per annum for loan servicing.

Lenders are expected to conduct an assessment of each potential borrower’s financial condition at the time of the potential borrower’s application.

Information Disclosure

The Fed will disclose information regarding the Main Street loans during the operation of Main Street Program, including information regarding names of lenders and borrowers, amounts borrowed and interest rates charged, and overall costs, revenues and other fees. The Fed also will disclose information concerning the Main Street Program one year after the effective date of the termination of the authorization of the Main Street Program.

The disclosure will include names and identifying details of each participant in the Main Street Program, the amount borrowed, the interest rate or discount paid, and information concerning the types and amounts of collateral pledged or assets transferred in connection with participation in the Main Street Program.

Loan Application

The Federal Reserve will publicly issue a loan participation agreement form, borrower and lender certifications form, and other form agreements that are necessary to implement the Program in accordance with the term sheets.

Once the Program is operational, small and medium-sized businesses interested in the Program can apply for Program loans by contacting an eligible lender. A description of eligible lenders can be found in the Program term sheets.

Program Launch Date and Updates

Updates regarding the Main Street Program, including the official launch date, and the time and date at/on which the Fed will begin purchasing participations in Main Street loans, will be made available on the Fed’s website. In addition, term sheets for the three types of Main Street loans and a frequently asked questions document can be found on the Federal Reserve’s website: https://www.federalreserve.gov/monetarypolicy/mainstreetlending.htm

This information may answer some questions, but is not intended to be a comprehensive analysis of the topic. In addition, such information should not be relied upon as the only source of information; professional tax and legal advice should always be obtained.

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