Main Street Lending Program Expanded to More Businesses

Update 6/10/20

On Monday, June 8^th, the Federal Reserve Board again revised the Main Street Lending Program, providing increased access to more small and medium-sized businesses. The $600 billion loan program has yet to fund a single loan, and criticism of the Fed’s latest stimulus effort in recent weeks has put pressure on the Fed to relax certain requirements, providing more flexibility to eligible borrowers.  The Fed has received a growing chorus of complaints from lenders and small businesses about the program’s stringent requirements, which has been keeping businesses and lenders on the sidelines.

The program was intended to serve as a lifeline for middle-market businesses shut out or ineligible for the Paycheck Protection Program. The Fed has tried to limit exposure stemming from borrower defaults, and has positioned the Fed as a lender of last resort throughout the process. The program is the first time the Fed will lend directly to individual businesses since the Great Depression, and the rollout has been rocky from the start.

After soliciting feedback from a variety of sources, the Fed has communicated the following updates:

• The minimum loan amount for certain loans has been lowered to $250,000 from $500,000
• The maximum loan amount for certain loans has been increased to $300M
• The term for each loan has been increased to five years from four years
• The initial payment deferral period has been increased to two years from one, for all loans under the Program
• The Federal Reserve will purchase a participation interest from lenders up to 95% for all loans

An exact launch date for the program has not been announced, but the Fed is expected to work with lenders to roll out the program quickly in the coming days.

Original Post 4/13/20

The Federal Reserve announced this week the creation of the Main Street Lending Program, a new lending program to help small to midsize firms that need access to cash because of the coronavirus pandemic. The central bank has allocated $600 billion to the Program, and funds will be made available through two lending facilities, the Main Street New Loan Facility (MSNLF) and the Main Street Expanded Loan Facility (MSELF). The Federal Reserve is currently accepting comments through April 16^th 2020 and it is anticipated the program will begin accepting applications as early as May 1^st 2020. As this program is developing we will continue to update guidance as new information becomes available. Below are key highlights of the program: 

General Guidance

• Four-year loans to businesses that meet specific criteria and were in good financial standing before the coronavirus hit
• Businesses can obtain PPP loan and Main Street Loan
• Principal and Interest deferred for one year
• Businesses seeking these loans must commit to making reasonable efforts to maintain payroll and retain workers

Eligibility

• Have up to 10,000 employees or up to $2.5 billion in 2019 annual revenues
• Must be a business created or organized in the United States or under the laws of the United States, with significant operations in and a majority of its employees based in the United states

Loan Facilities Available

2 facilities available under the Main Street Lending Program

Main Street New Loan Facility (MSNLF)

• New loans that originate on or after April 8, 2020
• Maximum loan size is the lesser of $25 million or an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed four times that borrower’s 2019 EBITDA

Main Street Expanded Loan Facility (MSELF)

• Allows banks to increase the size of an outstanding loan issued prior to April 8, 2020 to a business customer, rather than initiate a new loan
• Maximum loan size is $150 million for the MSELF, 30% of the borrower’s existing outstanding and committed but undrawn bank debt, or an amount that, when added to the borrower’s existing and outstanding and committed but undrawn debt, does not exceed six times that borrower’s 2019 EBITDA 

Companies cannot participate in both Main Street New Loan Facility and the Main Street Expanded Loan Facility. Companies that participate in the Main Street Lending Program cannot participate in the Primary Market Corporate Credit Facility

Terms

• 4-year maturity
• Interest rate is an adjustable rate of the Secured Overnight Financing Rate (SOFR) currently 0.01% plus 2.50% – 4.00%
• Minimum loan size is $1 million
• P&I deferred for one year
• No prepayment penalty
• Lender will retain 5% of the facility originated, while FRB will purchase 95% of the facility originated through a special purpose vehicle (SPV)
• Facility Fee of 1.00% of the principal amount of the loan participation purchased by the Federal Reserve to be paid by the lender. The lender may require the Borrower to pay this fee.

Required Certifications

• Borrower must attest that it requires financing due to business disruption caused by coronavirus
• Cannot use loan proceeds to repay other loan balances, except for mandatory principal payments
• Borrower will not seek to cancel or reduce any of its outstanding lines of credit with the Main Street Lending Program lender or any other lender
• Borrower must attest it meets the EBITDA leverage conditions
• The borrower must attest that it 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. Applicable for the duration of the loan and for 12 months after the loan is paid off
  • May not repurchase an equity security that listed on a national securities exchange of the business or any parent company of the business, except to the extent required under a contractual obligation that was in effect on the date of enactment of the CARES Act (March 27, 2020).
  • May not pay dividends or make other capital distributions with respect to the common stock of the business.
  • Must comply with limitations on compensation under section 4004 of the CARES Act, which are summarized below:
    • Officers or employees with total compensation over $425,000 in calendar year 2019 shall not receive total compensation in excess of what was received by the officer or employee in calendar year 2019. Severance pay or other benefits received upon termination shall not exceed twice the total compensation received by the officer or employee in calendar year 2019.
    • Officers or employees with total compensation over $3 million in calendar year 2019 shall not receive total compensation over $3 million and 50% of the excess over $3 million of what was received in calendar year 2019.
  • Lenders and borrowers will each be required to certify that the entity is eligible to participate in the program, including in light of the conflicts of interest prohibition in section 4019(b) of the CARES Act.

The Federal Reserve Bank will stop purchasing participations in eligible loans on September 30 2020.