This update was authored by Kevin Burnett, Blake Holbrook and Ronak Chokhani.
On April 30, the Federal Reserve released additional guidance and an FAQ regarding the Main Street Lending Program (the “Program”). In a previous client alert, Stoel Rives’ corporate team discussed the fundamentals of the Program designed to provide liquidity to small- and medium-sized businesses impacted by COVID-19.
As of April 30, no Program launch date has been announced. Businesses can monitor the Federal Reserve’s webpage for information regarding the launch date. This Client Alert summarizes changes to the Main Street New Loan Facility (“MSNLF”) and the Main Street Expanded Loan Facility (“MSELF”). Additionally, it discusses the terms of the new Main Street Priority Loan Facility (“MSPLF”).
The Snapshot
- Eligibility for the Program was expanded to include eligible borrowers with up to 15,000 employees or up to $5 billion in 2019 revenue. This is an increase from the prior limits of 10,000 employees or up to $2.5 billion in 2019 revenue announced on April 9. Affiliation rules are the same as the Paycheck Protection Program (“PPP”).
- The minimum loan amount for all of the loan facilities was reduced to $500,000.
- A new loan facility, the MSPLF, allows a borrower to use loan proceeds to refinance existing debt owed by the Eligible Borrower.
- All loan facilities have an adjustable interest rate of LIBOR + 3%, a four-year maturity, a deferment of principal and interest payments for the first year, and annual principal amortization thereafter with no prepayment penalty.
- All Program loan facilities are non-forgivable.
- Eligible borrowers can participate in the Program regardless of whether they have received PPP Loans.
- The restriction on borrower distributions set out in the CARES Act will not apply to distributions made by a borrower S Corporation or other pass-through entity to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings. Other CARES Act requirements regarding compensation and stock repurchases are still fully in place for borrowers.
- Non-profit organizations are currently ineligible to borrow under the Program. The Federal Reserve will be evaluating the feasibility of adjusting the borrower eligibility criteria and loan eligibility metrics of the Program for such organizations.
- Borrowers likely need at least $125,000 in annual adjusted EBITDA to qualify for the MSNLF, and at least $83,333 in annual adjusted EBITDA to qualify for either the MSELF or MSPLF; higher levels of adjusted EBITDA are required for borrowers with existing outstanding and undrawn available debt.
The Details – Loan Sizing and New Borrower Certifications; Continuing Concerns
The Federal Reserve provided guidance on key components of loan sizing and introduced new requirements for borrower certifications.
Maximum loan sizing under the MSNLF, MSPLF, and MSELF is based on adjusted EBITDA and existing outstanding and undrawn available debt. The sum of existing debt and new debt under the Program must be less than a given multiple of adjusted EBITDA, discussed in greater depth here.
The Federal Reserve clarified that adjusted EBITDA, which is not defined by GAAP, can be calculated using any method used previously by the Eligible Lender when extending credit to an Eligible Borrower (for MSNLF, MSPLF, and MSELF) or to similarly situated borrowers (for MSNLF and MSPLF).
The Federal Reserve also clarified that “existing outstanding and undrawn available debt” includes (i) all amounts borrowed under any loan facility or bond regardless of lender, and (ii) all unused commitments under any loan facility, excluding commitments related to financing of receivables and commercial paper, and commitments that are no longer available or available only with the posting of additional collateral. Existing outstanding and undrawn available debt will be calculated as of the date of the loan application.
New borrower certifications are now required under the Program. Among these is a certification that borrowers make commercially reasonable efforts to maintain their payroll and retain their employees during the loan term. Based on the FAQ, this mean means that a borrower “should undertake good-faith efforts to maintain payroll and retain employees, in light of its capacities, the economic environment, its available resources, and the business need for labor.” Borrowers that have laid-off or furloughed workers due to the economic effects of COVID-19 are still eligible to apply for loans under the Program.
We note that the new Federal Reserve guidance, other than with respect to tax distributions for pass-through entities, did not adjust the Program’s limits on distributions, equity repurchases and compensation that apply for 12 months past the time the loan has been repaid. Given that the loans will have a four year term, borrowers will be required to live with these restrictions for up to five years. It remains to be seen whether borrowers will balance these restrictions against the loan terms and seek loans under the Program.
Introducing the MSPLF
In its release, the Federal Reserve introduced a third loan facility, the MSPLF, in addition to the previously announced MSNLF and MSELF. The MSPLF is unique in that it allows the borrower to refinance existing debt owed by the borrower to any other lender at the time of origination of the Eligible Loan. In exchange, the new MSPLF loan must be senior to or pari passu with the borrower’s other loans or debt instructions, excluding mortgage debt. The maximum loan amount for the MSPLF is the lesser of (i) $25 million or (ii) an amount that, when added to the borrower’s existing outstanding and undrawn available debt, does not exceed six times the borrower’s adjusted 2019 EBITDA.
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, Main Street Expanded Loan Facility, Main Street Priority Loan Facility term sheets.