The Main Street Lending Program. The Next Life Line for Small and Mid-Sized Businesses

On April 8, the Board of Governors of the Federal Reserve System (the “Fed”) took action under the CARES Act to announce the creation of a new loan facility called the Main Street Lending Program. The Program makes available low interest loans on favorable terms to qualified small to mid-sized U.S. based businesses to help them weather the COVID-19 Emergency. With the SBA Paycheck Protection Program (“PPP”) out of appropriated funds as of April 15^th, the Main Street Lending program could not come sooner for businesses that either did not qualify for a PPP loan, or are now locked out of this program. Importantly, even those businesses that were able to secure a PPP loan may take out a Main Street loan as well, offering another life line for small and mid-sized businesses to help weather the current crisis.

Under the Main Street Lending Program, eligible small and mid-sized businesses with less than 10,000 employees, including non-profits, may be eligible to borrow anywhere from $1 million up to $150 million. The program creates two separate lending facilities, a New Loan Facility and an Expanded Loan Facility. The New Loan Facility applies to businesses that either do not have existing credit agreements or have sufficient capacity under their existing agreements to incur new indebtedness. The Expanded Loan Facility is structured to work as an increase to a business’ term loan facilities that are already outstanding. The loans would be issued by U.S. banks, bank holding companies and savings and loan institutions, with a commitment by the Fed to participate in the loans at 95%, leaving lenders with a 5% stake in Program.

Under the New Loan Facility, the maximum amount a business can borrow is capped at $25 million or an amount that, when added to the business’ existing outstanding and committed but undrawn debt, does not exceed four (4) times the business’ 2019 earnings before interest, taxes, depreciation, and amortization (“EBITDA”). For businesses borrowing under the Expanded Loan Facility, they are eligible to borrow up to $150 million, but not more than 30% of the business’ existing outstanding and committed but undrawn bank debt, or an amount that, when added to the business' existing outstanding and committed but undrawn debt, does not exceed six (6) times the business’ 2019 EBITDA.

Under both the Main Street New Loan and the Expanded Loan offerings, the terms are favorable, including a four (4) year term with amortization of principal and interest deferred for one year, an adjustable rate of interest of 250-400 basis points, and no pre-payment penalties.  Lenders are permitted to charge a fee set at 100 basis points of the principal amount of the loan. For New Loan Facilities, the loans are non-recourse. For Expanded Loan Facilities, any collateral securing the full loan, whether such collateral was pledged under the original terms of the existing loan or at the time of upsizing under the Main Street program, will secure the loan participation on a pro rata basis.

There are strings attached to the loans. Unlike PPP loans, the Main Street loans are not subject to forgiveness and must be repaid. In addition, businesses tapping the loans must commit to the following:

• The business must attest that it requires financing due to the exigent circumstances presented by the COVID-19 pandemic.
• The proceeds of the loan may not be used by the business to repay or refinance pre-existing loans or lines of credit, or to repay other loan balances.
• The business must refrain from repaying other debt of equal or lower priority, with the exception of mandatory principal payments, unless the borrower has first repaid the Main Street loan in full.
• The lender must attest that it will not cancel or reduce any existing lines of credit outstanding to the business, and the business must attest that it will not seek to cancel or reduce any of its outstanding lines of credit with the lender or any other lender.
• Using the proceeds of the loan, the business must make “reasonable efforts” to maintain its payroll and retain its employees during the term of the Loan. 
• The business must attest that it will follow certain stock repurchase and capital distribution restrictions provided in the CARES Act. These include prohibitions on the payment dividends with respect to the common stock of the business or the repurchasing securities (except where required under a contractual obligation in effect as of March 27), for the term of the Loan.
• During the period of the loan plus one year after repayment, executive compensation is capped at $425,000 per year. For executives who received compensation in excess of $425,000 in 2019, the business’ ability to pay these executives will be capped at the amount of 2019 compensation. The restrictions also apply to severance pay and benefits to executives upon separation from the business.
• Businesses owned by the President, Vice President, an Executive Department Head, or a Member of Congress can’t participate in the Program.

As of Friday April 17, the Main Street Lending Program has not yet gone live. Once opened, the Fed has indicated that the Program will continue until all funds appropriated by Congress under the CARES Act have been spent, or September 30, 2020, whichever occurs first. Given how fast the PPP loan funds were gobbled up by businesses under the SBA program, we are advising clients who might want to participate in Main Street Lending Program not to wait. Businesses who are interested should promptly reach out to their lending institutions now to find out if they intend to participate, and if so, to begin the process of gathering the information needed to complete their application. In particular, businesses with existing credit agreements will need to discuss with their current lenders whether they intend to participate. If not, their existing loan documents may require the permission of the lender to pursue participation in the Program from another bank.
 
For more information regarding the Main Street Lending Program assistance in determining whether your business may qualify, or with preparing an application for a Main Street Loan, please contact Frantz Ward Partner Craig Haran or another member of Frantz Ward’s Business/Corporate Law Practice Group.