On April 9, 2020, the Federal Reserve and the Secretary of the Treasury announced, pursuant to Title IV of the Coronavirus Aid, Relief, and Economic Security Act, or “CARES Act” and Section 13(3) of the Federal Reserve Act, the establishment of the Main Street Lending Program, which will provide up to $600 billion in loans to small and mid-sized businesses (including nonprofits) with up to 10,000 employees or with not more than $2.5 billion in 2019 annual revenues.
The Main Street Lending Program will consist of two separate facilities: (i) the Main Street New Loan Facility (“MSNLF”) and (ii) the Main Street Expanded Loan Facility (“MSELF”). The MSNLF will provide new Main Street Loans to qualifying businesses, and the MSELF will use Main Street Loans to increase the size of a qualifying business’ existing credit facility. Eligible Lenders (defined below) may offer loans to qualifying businesses through either of the two facilities. These loans will then be participated by the lender with a special purpose vehicle (the “SPV”) established by a Federal Reserve Bank for the purpose of purchasing participations in such loans (as further described below).
An Eligible Borrower (defined below) may choose to participate in either of the two Main Street Lending Program Facilities (it cannot avail itself of both), and further, an Eligible Borrower that participates in a Main Street Lending Program facility may not also participate in the Primary Market Corporate Credit Facility (for more information on this program, see this link). Notably, however, participation by an Eligible Borrower in the Paycheck Protection Program (“PPP”) does not preclude it from also participating in one of the Main Street Lending Program facilities (for more information on this program, see this link).
Terms of Main Street Lending Program Facilities
The following is a summary of the terms of the two facilities, as set forth in the term sheets released by the Federal Reserve:
Eligible Lenders. U.S. insured depository institutions, bank holding companies, and savings and loan holding companies.
Eligible Borrowers. Businesses (including nonprofits) with up to 10,000 employees or with not more than $2.5 billion in 2019 annual revenues. Each Eligible Borrower must be a “U.S. business,” meaning that it is created or organized in the United States or under the laws of the United States with significant operations, and a majority of its employees based in, the United States.
Eligible Loans. Eligible Loans under MSNLF are unsecured term loans made on or after April 8, 2020. Eligible Loans under MSELF are upsized tranches of existing credit facilities and, as such, may be secured or unsecured, depending upon the terms of the underlying credit facilities and the terms negotiated with respect to the upsized tranches. Additionally, an Eligible Loan must have the following terms:
(a) MSNLF Loans: the lower of (i) $25 million or (ii) an amount that, when added to the Eligible Borrower’s existing outstanding and committed but undrawn debt, does not exceed four (4) times the Eligible Borrower’s 2019 earnings before interest, taxes, depreciation, and amortization (“2019 EBITDA”); or
(b) MSELF Loans: lowest of (i) $150 million, (ii) 30% of the Eligible Borrower’s existing outstanding and committed but undrawn bank debt, or (iii) an amount that, when added to the Eligible Borrower’s existing outstanding and committed but undrawn debt, does not exceed six (6) times the Eligible Borrower’s 2019 EBITDA.
Required Attestations. In addition to certifications required by applicable laws and regulations (including those required under Title IV of the CARES Act, more information on which can be found here), both the lender and the borrower will be required to make certain attestations, including, that (i) proceeds of the Eligible Loan will not be used to repay or refinance pre-existing loans, (ii) the borrower’s existing lines of credit will not be reduced or cancelled, and (iii) the borrower will refrain from voluntarily repaying other debt of equal or lower priority (other than mandatory principal payments), unless the Eligible Loan has been paid in full. The borrower must also certify that it will make reasonable efforts to maintain its payroll and retain its employees during the term of the Eligible Loan and that it will comply with the employee compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under Section 4003(c)(3)(A)(ii) of the CARES Act, a summary of which can be found here.
Fees. Applicable fees include: (i) for both Facilities, a 1% origination fee payable by the borrower to the lender; and (ii) for the MSNLF, a 1% facility fee payable by the lender to the SPV (this fee may be passed through to the borrower).
Loan Participations. Until September 30, 2020, the SPV will purchase from Eligible Lenders a 95% participation in each Eligible Loan at par value, while the Eligible Lender will hold 5% of the
Eligible Loan. The SPV and the Eligible Lender will share risk on a pari passu basis. The SPV will pay an Eligible Lender a per annum servicing fee of 0.25% of the principal amount of its participation in each Eligible Loan. The SPV will fund such purchases and fees through recourse loans from the Federal Reserve and a $75 billion equity investment from the Department of the Treasury.
Links to the term sheets for each facility are as follows:
Open Questions Regarding Main Street Facility Eligibility and Terms
Although the term sheets provide helpful information about the major features of these facilities, they also raise questions about the eligibility of certain businesses and the terms of these facilities. Among these are questions as to (i) whether affiliation rules akin to those that apply to SBA loan programs (e.g., the PPP) would apply for purposes of determining a business’ eligibility (for a summary of the affiliation rules applicable to the PPP, see this link), (ii) the manner in which EBITDA will be defined for purposes of calculating the leverage ratio condition described above and (iii) the manner in which prohibitions on items such as prepayments of other existing debt and payments of dividends will be applied.
Locke Lord team members are closely following further developments with respect to the Main Street Lending Program and expect to publish additional guidance as further information from the Department of the Treasury and/or the Federal Reserve becomes available.
Your regular Locke Lord contact and the authors of this article would be happy to help you navigate the CARES Act and associated guidance as they relate to or otherwise affect small and mid-sized businesses, including nonprofits, and their lenders.
Visit our COVID-19 Resource Center often for up-to-date information to help stay informed of the legal issues related to COVID-19.
1 SOFR is the Secured Overnight Financing Rate, the average rate at which financial institutions can borrow U.S. dollars overnight by posting U.S. Treasury bonds as collateral. As of the date of this QuickStudy, SOFR was 0.01%. Lenders and borrowers may negotiate the pricing spread over SOFR within the prescribed range of 250 to 400bps.
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