After the enactment of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), the federal government has been primarily focused on providing funding to small businesses through the Paycheck Protection Program (“PPP”) (which we have previously addressed here and here). However, many U.S. businesses are still in need of liquidity as a result of the COVID-19 pandemic.
To help businesses with liquidity concerns, on April 9, the Federal Reserve announced that it will provide up to $600 billion under both the Main Street New Loan Facility (“MSNLF”) and the Main Street Expanded Loan Facility (“MSELF,” and together with the MSNLF, the “Main Street Lending Program”) using funds appropriated to it under the CARES Act.
Eligibility
The Main Street Lending Program is intended to provide financing for a range of small and mid-sized businesses, many of which are not eligible for relief under the PPP or other programs established by the Federal Reserve. The MSNLF is intended to help facilitate new loans to businesses, while the MSELF is intended to help facilitate the extension of already existing loans. Borrowers can only participate in either the MSNLF or the MSELF (they cannot utilize both). However, it is important to note that businesses that have taken advantage of the PPP may also take out a loan under the Main Street Lending Program.
The Main Street Lending Program is open to U.S. companies that (i) were in good financial standing before the crisis caused by COVID-19; (ii) are U.S. entities and have significant operations, and a majority of their employees based, in the United States; and (iii) either (a) have up to 10,000 employees or (b) have up to $2.5 billion in revenue. Eligible borrowers will be required to certify and attest that they are in need of financing due to “exigent circumstances” presented by the COVID-19 crisis, and that they will comply with certain restrictions and conditions.
We expect that additional details regarding borrower eligibility will be provided by the Federal Reserve prior to the Main Street Lending Program becoming operational.
Loan Terms
The Federal Reserve will issue four-year loans to eligible businesses, with principal and interest payments deferred for one year after the loan is disbursed. Loans will be made for a minimum of $1 million and may not exceed either:
For the MSNLF, the lesser of (a) $25 million; or (b) an amount that, when added to the eligible business’ existing outstanding and committed but undrawn debt, does not exceed four times the eligible business’ 2019 earnings before interest, taxes, depreciation, and amortization (“EBITDA”); or
For the MSELF, the lesser of (a) $150 million; (b) 30% of the eligible business’ existing outstanding and committed but undrawn bank debt; or (c) an amount that, when added to the eligible business’ existing outstanding and committed but undrawn debt, does not exceed six times the eligible business’ 2019 EBITDA.
The interest rate on all loans under the Main Street Lending Program is an adjustable rate equal to the Secured Overnight Financing Rate (“SOFR”) plus 250 to 400 basis points. The SOFR is currently 0.01%.
Restrictions and Conditions
To receive a loan, borrowers must commit to make “reasonable efforts” to maintain payroll and retain workers. In addition, borrowers must follow the compensation, stock repurchase, and dividend restrictions that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act. Those restrictions are as follows:
- Compensation Restrictions. No officer or employee of the borrower whose total compensation exceeded $425,000 in calendar year 2019 may receive: (a) total compensation, during any 12 consecutive months, exceeding his or her total compensation in 2019, or (b) severance pay or other benefits upon termination of employment that exceeds twice the maximum total compensation received in 2019. No officer or employee of the borrower whose total compensation exceeded $3 million in calendar year 2019 may receive total compensation, during any 12 consecutive months, in excess of the sum of (i) $3 million and (ii) 50% of the total compensation received by that employee in calendar year 2019, in excess of $3 million.
- Stock Repurchase Restriction. Borrowers must not repurchase an equity security of the borrower or the borrower’s parent company that is listed on a national securities exchange, unless the repurchase is required under a contractual obligation that was in effect as of March 27, 2020 (the date the CARES Act was enacted).
- Dividend/Capital Distribution Restriction. Borrowers must not pay dividends or make other capital distributions with respect to the borrower’s common stock until one year after the date on which the loan is no longer outstanding.
Borrowers are also prohibited from seeking to cancel or reduce any outstanding lines of credit with the lender making the Main Street loan or any other lender.
Lenders
The Main Street Lending Program is limited to certain types of “eligible lenders,” which includes U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies. Lenders may participate in one or both facilities (unlike borrowers, which, as discussed above, are only permitted to participate in one).
Lenders must also certify that they meet eligibility requirements and attest (i) that the proceeds of the loan will not be used to repay or refinance pre-existing loans or lines of credit made by the lender to the borrower, and (ii) that the lender will not cancel or reduce any existing lines of credit outstanding to the borrower.
Next Steps
The Federal Reserve has not yet provided a timeframe for when the Main Street Lending Program will be operational. The Federal Reserve and Treasury sought comments on the program through April 16, and we expect that additional guidance will be provided in the weeks that follow. We will be tracking updates to the Main Street Lending Program closely, and will provide further guidance as more information becomes available.
This update is prepared for the general information of our clients and friends. It should not be regarded as legal advice. If you have questions about the issues raised here, please contact any of the attorneys in our Business Department or Corporate Finance Practice Group, or the attorney with whom you normally consult.
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