By Louis P. Alexander Jr. on April 17, 2020
On April 9, 2020, the U.S. Federal Reserve Bank (Federal Reserve) released new details regarding the Main Street Lending Program (the "MSL Program"). Once opened, the MSL Program will extend much-needed government support to mid-sized businesses.
Purpose of the Main Street Lending Program
The MSL Program was established by the Federal Reserve, with approval of the Treasury Secretary, to support the flow of credit to businesses to counter the economic impact of the novel coronavirus pandemic and promote a swift recovery once the disruptions abate.
While the goal of the Federal Reserve is to support employers of all sizes, the MSL Program’s focus is to ensure that credit flows to small and mid-sized businesses with the purchase of up to $600 billion in loans. The U.S. Department of the Treasury, using funding from the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) will provide $75 billion in equity to the facility. Thus, the MSL Program represents a significant extension of governmental support to mid-sized businesses, given that the Small Business Administration’s (SBA) ubiquitous Economic Injury Disaster Loan (EIDL) and Paycheck Protection Program loan (PPP) programs are available only to qualifying small businesses.
MSL Program Overview
The Federal Reserve sought comments regarding the Main Street Lending Program through April 16, 2020. Accordingly, the terms of the MSL Program outlined in the April 9 term sheets and discussed below are subject to change. The release of the final regulations and guidance is anticipated to occur shortly after the expiration of the comment period.
The MSL Program is comprised of two different loan facilities: the Main Street New Loan Facility (MSNLF) and the Main Street Expanded Loan Facility (MSELF) (links to the term sheets for each facility are provided here and here). The MSNLF will provide for newly-originated loans to Eligible Borrowers, while the MSELF will allow Eligible Borrowers to increase the amount of (or “upsize”) existing term loans. Payments of principal and interest due on the MSL Program facilities will be deferred for one year.
Both facilities are available to businesses with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues. The Eligible Borrower must be a business that is created or organized in or under the laws of the United States, with significant operations and a majority of its employees based in the U.S. In the terms sheets, the Federal Reserve states that the MSL Program is intended to enhance support for small and mid-sized businesses “that were in good financial standing before the crisis”, but provides no further explanation of the requisite qualifications for good financial standing. Further guidance and clarification of such eligibility requirements are expected to appear in the final regulations for the MSL Program.
Eligible Lenders are U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies.
An Eligible Loan for the MSNLF is an unsecured term loan made by an Eligible Lender to an Eligible Borrower that was originated on or after April 8, 2020. Conversely, an Eligible Loan for the MSELF is a term loan that was originated before April 8, 2020. Both MSNLF and MSELF must contain the following requisite features:
(1) 4-year maturity;
(2) Amortization of principal and interest deferred for one year;
(3) Adjustable interest rate of SOFR + 2.5% to 4%;
(4) Minimum loan size of $1 million;
(5) Maximum loan size [discussed below]; and
(6) Prepayment permitted without penalty.
The maximum loan size for a MSNLF Eligible Loan is the lesser 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 times the Eligible Borrower’s 2019 earnings before interest, taxes, depreciation, and amortization (“EBITDA”).
Meanwhile, the maximum loan size for a MSELF Eligible Loan is the lesser 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 times the Eligible Borrower’s 2019 EBITDA.
Under the MSL Program, a Federal Reserve Bank will commit to lend to a single common special purpose vehicle (SPV) on a recourse basis. The SPV, an entity created solely for administration of the MSL Program, will purchase 95% participations in Eligible Loans from Eligible Lenders, while Eligible Lenders will retain the remaining 5%. The combined size of the two MSL Program facilities will be $600 million. Any collateral securing a MSELF Eligible Loan will secure the loan participation on a pro rata basis.
Businesses that have taken advantage of the SBA’s PPP loans may also obtain MSL Program loans. However, the MSNLF and MSELF are mutually exclusive, in that a borrower may not participate in both facilities. Furthermore, a borrower may not participate in both the MSL Program and the Federal Reserve’s Primary Market Corporate Credit Facility (PMCCF).
Another important caveat to prospective borrowers is that, unlike some of the emergency programs presently offered by the SBA, the MSL Program loans are not forgivable. Consequently, the borrower must repay all of the principal amount and interest incurred on the loan.
Requirements for Borrowers
Businesses seeking MSL Program loans must commit to make reasonable efforts to maintain payroll and retain workers. The expected requirement is approximately 90% employee retention.
Borrowers must also follow compensation, stock repurchase, and dividend restrictions that apply to direct loan programs under the CARES Act. The regulations will impose limitations and restrictions on dividends and other capital distributions and on compensation paid to highly compensated individuals (salaries exceeding $425k).
The MSL Program loan applications and related loan documents will contain several representations, warranties and covenants of the borrower. Borrowers must attest to certain matters, including, among others, statements regarding the borrower’s satisfaction of the eligibility requirements and the borrower’s commitment to make compliant use of the loan proceeds. In addition, borrowers will most likely be required to grant negative covenants in favor of the lender, such as refraining from using the loan proceeds for prohibited purposes (e.g. no refinancing or retiring existing lines of credit).
The MSL Program loans require the payment of certain loan fees. For the MSNLF facility, the lender will pay the SPV a facility fee of 1% of the principal amount of the loan, which the lender may (and likely will) require the borrower to pay. In addition, the borrower will pay the lender 1% of the principal amount as an origination fee (totaling a possible 2% fee for the borrower). For the MSELF facility, the borrower will pay the Lender a fee of 1% of the upsized tranche principal at time of upsizing the existing loan. Finally, for each facility, the SPV will pay the Lender 0.25% per annum for servicing.
The SPV will cease purchasing participations in Eligible Loans on September 30, 2020, unless the facility is extended by the Board of Governors of the Federal Reserve System and the Treasury Department.
The maximum loan amount available to a Borrower will be based upon a calculation of the Borrower’s existing outstanding and committed but undrawn debt (e.g., lines of credit) and 2019 EBITDA. Accordingly, in anticipation of the MSL Program’s commencement, and the need for expeditious submission of the loan application and required deliveries, applicants should begin gathering all required information well in advance (e.g. existing loan documents and information, balance sheets, income statements, cash flow statements, financial statements).
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Prospective MSL Program applicants should proactively contact their existing lenders to assess their current financial condition, outstanding debt, funding needs, and which facility will best suit their business.
The attorneys at Brouse McDowell are skilled in the area of commercial finance and can assist your business in pursuing a new credit facility or an extension of an existing credit facility under the Main Street Loan Programs. Please contact our Business Transactions & Corporate Counseling Group for more information.
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