In testimony before the Senate Banking Committee on May 19, Jerome Powell, the Chair of the Board of Governors of the Federal Reserve System (the “Fed”), promised to have the Main Street Lending Program (the “Program”) ready by June 1. Once launched, the Program will offer up to $600 billion in loans to small and medium sized businesses struggling to recover from the COVID-19 Pandemic and resulting economic crisis. The Program will launch with some significant changes from the initial proposal made in early April. (See our previous Client Alert on the Main Street Loan Program Proposal here
The Program has been expanded to include three separate lending facilities from the two initially proposed on April 8, as follows:
The Main Street New Loan Facility (MSNLF).
This facility reduces the minimum loan amount to $500,000 (from an initially proposed $1 million minimum) and sets the maximum at the lesser of $25 million, or an amount that does not exceed 4 times the borrower’s adjusted 2019 earnings before interest, taxes, depreciation, and amortization (“EBITDA”). The loan may not be subordinated in terms of priority to any of the borrower’s other loans or debt instruments. The loan terms provide for principal amortization of 1/3 at the end of the second year, 1/3 at the end of the third year, and 1/3 at maturity at the end of the fourth year.
The Main Street Priority Loan Facility (MSPLF).
This facility also allows for minimum loans of not less than $500,000, but expands the maximum amount available to a borrower of the lesser of $25 million or an amount that, when added to the borrower’s existing outstanding and undrawn available debt, does not exceed 6 times the borrower’s adjusted 2019 EBITDA. This loan must be senior to or pari passu with the borrower’s other loans or debt instruments, other than mortgage debt
. This carve out for mortgage debt from the priority and security requirements is a material change from the initial proposal. The loan terms provide for principal amortization of 15% at the end of the second year, 15% at the end of the third year, and a balloon payment of 70% at maturity at the end of the fourth year. Borrowers may, at the time of origination of the loan, refinance existing debt owed by the borrower to a lender other than the lender making the MSPLF loan.
The Main Street Expanded Loan Facility (MSELF).
This facility provides an ability for lenders to increase a borrower’s existing term loan or revolving credit facility in a minimum upsized loan amount of not less than $10 million, and a maximum loan amount at the lesser of $200 million, 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 an amount that, when added to the borrower’s existing outstanding and undrawn available debt, does not exceed 6 times the borrower’s adjusted 2019 EBITDA. Such loan must be senior to or pari passu with the borrower’s other loans or debt instruments. The facility similarly carves out mortgage debt from the priority and security requirements.
The loan terms provide for principal amortization of 15% at the end of the second year, 15% at the end of the third year, and a balloon payment of 70% at maturity at the end of the fourth year.
Each of the above facilities provide for the same general eligibility requirements. Participants must constitute U.S. based businesses in operation as of March 13, 2020, with 15,000 or fewer employees (increased from 10,000 in the initial proposal), or not more than $5 billion in annual revenues. (This $5 billion revenue threshold constitutes a new way for businesses to qualify for the program even if they employ more than 15,000 employees). Such businesses cannot otherwise be prohibited from participating in the Paycheck Protection Program (“PPP”) loans administered by the Small Business Administration under its rules, and cannot have received financial support under the CARES Act from any programs other than the PPP loan program. Each of the three loan facilities provides for a 4-year maturity with principal and interest deferred for 1 year, with an adjustable rate of interest set at LIBOR plus 300 basis points. Each facility permits pre-payment of the loan without penalty. Main Street loans are not subject to forgiveness.
There are several key areas where the final Program differs from the April 8 proposal:
Qualified Lenders and Participation Levels.
In addition to US banks, bank holding companies, savings and loans, and federally insured depository institutions (including credit unions), the Fed has expanded the types of lenders who may participate in the program to include U.S. branches or agencies of foreign banks, and US subsidiaries of foreign banks. Lenders will be required to retain a 5% participation level in any MSNLF or MSELF loan it originates, and a 15% participation level in any MSPLF loan. Lenders are required to conduct an assessment of an applicant’s financial condition at the time of application.
Non-Profits and Tribal Businesses.
According to the FAQ document issued by the Fed describing the Program, non-profit organizations are not permitted to participate at this time. The Fed did comment that it “will be evaluating the feasibility of adjusting the borrower eligibility criteria and loan eligibility metrics of the Program for such organizations” in the future. Indian tribal business concerns may participate in the Program.
The original Main Street lending proposal required businesses who received loans to use the proceeds specifically to “make reasonable efforts to maintain its payroll and retain its employees during the term of the Eligible Loan.” This has been changed to provide that recipients would only be expected to make “commercially reasonable efforts” to maintain payroll and retain employees during the Loan term, without any commitment to actually use the loan proceeds to do so. The FAQ clarifies that borrowers 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.” Congressional critics have complained that this change has eviscerated any obligation for businesses receiving Main Street loans to use the proceeds to preserve jobs.
Prior Financial Solvency.
There is a new requirement for the borrower to demonstrate that it was in sound financial condition prior to the onset of the COVID-19 crisis. Applicants will need to do so by showing that any prior existing loans it holds must have had an internal risk rating equivalent to a “pass” in the Federal Financial Institutions Examination Council’s supervisory rating system as of December 31, 2019.
No Impending Bankruptcy.
The Program will also require applicants to certify that 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 initial proposal included no such requirement.
Dividends and Capital Distributions.
The final Program adopts significant restrictions on the payment of executive compensation, and the suspension of dividends payments, equity distributions and stock buybacks during the loan period. However, such restrictions will not apply to distributions made by an S corporation or other tax pass-through entity to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings. There are concerns that these restrictions will reduce businesses’ desire to seek Main Street loans.
Publicly Available Information.
The Fed has indicated in its FAQ that borrower information will be made available to the public, including “information regarding names of lenders and borrowers, amounts borrowed and interest rates charged, and overall costs, revenues and other fees.” Potential borrowers will therefore need to be mindful that their participation in the Program will be available to media outlets for review and scrutiny.
Once launched, the Program will continue until all funds appropriated by Congress under the CARES Act have been spent, or September 30, 2020, whichever occurs first.
For more information regarding the Main Street Lending Program, or with assistance in determining whether your business may qualify, or with preparing an application for a Main Street loan, please contact Craig Haran
or another member of Frantz Ward’s Business Practice Group.
Frantz Ward's Coronavirus Response Team assists clients in navigating the multitude of issues presented by the current crisis. For assistance in addressing these issues or in developing other strategies to protect your business, please contact Frantz Ward Partners Brian Kelly
or Christopher Koehler
and they will engage the appropriate members of the response team. In addition, please visit the Frantz Ward Coronavirus Daily Update/Resource Center
for up-to-date information and links