This update was authored by Kevin Burnett and Ronak Chokhani.
On April 9, 2020, the Federal Reserve shared details of the Main Street New Loan Facility (“MSNLF”) and the Main Street Expanded Loan Facility (“MSELF”), which in combination establish the $600 billion Main Street Lending Program (“Program”) intended to help small and mid-sized businesses navigate the financial challenges caused by the COVID-19 pandemic. Businesses that were previously eligible to receive funds under the Paycheck Protection Program (“PPP”) can also qualify to receive a Program loan. Program loans will be made by eligible private lenders. To prepare for the application process, businesses should familiarize themselves with the Program fundamentals discussed below.
Eligibility
Businesses with no more than 10,000 employees or no more than $2.5 billion in 2019 annual revenues, that “were in good financial standing before the crises,” can receive a Program loan. Further guidance is expected to be forthcoming regarding the calculation of annual revenues and the determination of “good financial standing” for Program purposes. Additionally, to be eligible, businesses must (i) be created or organized in the U.S. or under the laws of the U.S.; (ii) have significant operations in the U.S.; and (iii) have a majority of its employees based in the U.S.
Eligible lenders include “U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies.” Much like the PPP, we anticipate that there will be a rush to obtain Program loans. Thus, businesses should consider contacting existing lenders to open a dialogue on a potential Program loan.
Note that businesses who receive MSNLF funding will be ineligible to participate in the MSELF or the Primary Market Corporate Credit Facility (“PMCCF”). Thus, it is imperative that businesses analyze whether the MSNLF, MSELF, or PMCCF best suits their needs and utilize the appropriate facility.
Loan Details
An eligible loan under the MSNLF is an unsecured term loan, made on or after April 8, 2020, that satisfies the Loan Requirements discussed below, but a loan under the MSELF is a term loan, originated before April 8, 2020, where the “upsized tranche of the loan” satisfies the Loan Terms discussed below. MSELF loans will be secured by existing collateral and/or additional or new collateral, but no collateral will be needed for an unsecured MSNLF loan.
Loan Requirements. All Program loans will have a maturity of four years, and will have an interest rate of 2.51% to 4.01%[1] likely depending on the lender’s risk assessment of the borrower and its industry. Under the MSNLF, at minimum, businesses will receive $1 million, but the loan amount will be capped to “the lesser of (i) $25 million or (ii) an amount that, when added to 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 Test I”).
Under the MSELF, the minimum loan amount is $1 million and the maximum amount 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 earnings before interest, taxes, depreciation, and amortization (“EBITDA Test II”).
Under both MSELF and MSNLF, the amortization of Program loan principal and interest will be deferred for one year, and businesses will be allowed to make prepayments without incurring a penalty. Note that, unlike the PPP, the Program does not have a loan forgiveness mechanism that businesses can utilize.
MSNLF Fees. While lenders are obligated to pay a “facility fee” in the amount of 1% of the principal loan amount, lenders are permitted to pass this fee on to the borrowers. Additionally, borrowers must pay a loan “origination fee” in the amount of 1% of the principal loan amount. Thus, businesses may have to pay up to 2% of the principal loan amount in fees. The facility will pay lenders a fee of .025% per annum of the loan principal as compensation for loan servicing.
MSELF Fees. At the time of upsizing, businesses must pay a fee in the amount of 1% “of the principal amount of the upsized tranche” of the loan. MSELF will pay the lender a servicing fee of .025% of “the principal amount of its participation in the upsized tranche” of the loan.
Required Attestations
In addition to attestations that may be required by other applicable statutes or regulations, to receive a Program loan, businesses must attest to the following:
- Proceeds will not be used to repay or refinance pre-existing loans or lines of credit;
- Until the Program loan is repaid in full, borrower will refrain from using proceeds to repay other loan balances or other debt of equal or lower priority (exception for mandatory principal payments);
- Borrower will not cancel or reduce (a) its existing lines of credit outstanding to the Program lender, or (b) its outstanding lines of credit with a Program lender or other lender;
- Financing is necessary due to exigent circumstances caused by the COVID-19 pandemic, and that borrower will make reasonable efforts to use Program funds for maintaining payroll and retaining employees;
- Borrower satisfies the EBITDA Test I for a MSNLF loan or EBITDA Test II for a MSELF loan;
- Borrower will comply with the following compensation, stock repurchase, and capital distribution restrictions applicable to direct loan programs as discussed in CARES Act Section 4003(c)(3)(A)(ii):
- Borrower must not engage in any repurchases of their equity (or of their parent company’s equity) listed on a national securities exchange while a direct loan is outstanding or for 12 months after the loan is no longer outstanding, except to the extent required under a contractual obligation incurred prior to the enactment of the CARES Act;
- Borrower must not make dividends or other capital distributions while a direct loan is outstanding or for 12 months after the loan is no longer outstanding;
- No officer or employee whose total compensation was greater than $425,000 in 2019 (exception for compensation determined pursuant to collective bargaining agreements entered into prior to March 1, 2020) can receive pay increases or be offered severance or other benefits that exceed more than two times their maximum compensation received in 2019; and
- No officer or employee whose total compensation was greater than $3,000,000 in 2019 can receive compensation in excess of (i) $3,000,000, plus (ii) 50% of the amount by which such person’s 2019 compensation exceeded $3,000,000.
- Subject to the conflict of interest rules in CARES Act Section 4019(b), borrower is eligible to participate in the Program.
In addition to the Program, “to increase the flow of credit to households and businesses through capital markets,” the Federal Reserve has expanded the Term Asset-Backed Securities Loan Facility, the PMCCF, and the Secondary Market Corporate Credit Facility. Additionally, a Paycheck Protection Program Liquidity Facility has been established to “extend credit to eligible institutions that originate PPP loans.” Finally, a Municipal Liquidity Facility has been established to “help state and local governments manage cash flow stresses” caused by the pandemic.
Stoel Rives has a dedicated team of experts prepared to answer your questions regarding the Program. Please contact Kevin Burnett at 503.294.9240 or kevin.burnett@stoel.com; Brant Norquist at 503.294.9143 or brant.norquist@stoel.com; John Laney at 206.386.7559 or john.laney@stoel.com; or Gary Barnum at 503.294.9114 or gary.barnum@stoel.com.
For additional information regarding the Program, please refer to the Federal Reserve’s guidance, and Main Street New Loan Facility and Main Street Expanded Loan Facility term sheets.
[1] This range of interest rates is subject to change if the Secured Overnight Financing Rate (“SOFR”) changes. Program loan interest rates are calculated as follows: Adjustable SOFR + 250 to 400 basis points.