The widespread closures of businesses due to coronavirus have rendered companies of all sizes scrambling for liquidity, but federal relief programs previously enacted have focused on small and large companies, with mid-size companies virtually excluded from federal relief. To narrow the gap for those companies, the Fed had created the Main Street Lending Program.
The Main Street Lending Program will provide additional financing for small- and medium-sized businesses by utilizing $75 billion of capital made available from the U.S. Treasury using funds from the CARES Act. When leveraged by the Federal Reserve, this capital will provide up to $600 billion in liquidity to participating lenders.
The Main Street Lending Program consists of two facilities: the Main Street New Loan Facility and the Main Street Expanded Loan Facility, both of which will be funded through a single common special purpose vehicle called the SPV. The SPV will be funded initially through that $75 billion equity investment by the Treasury Department, and the Federal Reserve will provide loans to the SPV.
Details of the program are as follows:
- Eligible lenders are any United States insured depository institution, bank holding company or U.S. savings and loan holding company.
- Eligible Borrowers are businesses that (i) have up to 10,000 employees or $2.5 billion in annual revenues, (ii) are organized in the United States and (iii) have significant operations and a majority of employees in the United States.
- Eligible Loans for purchase under the New Loan Facility will be unsecured term loans made on or after April 8, 2020, while those eligible for purchase under the Expanded Loan Facility will be term loans originated before April 8, 2020, and upsized in principal amount after that date.
- Borrowers under the Main Street Lending Program must agree to significant restrictions on the operation of their businesses. These restrictions are set forth in the CARES Act and include:
- During the term of the loan and for 12 months thereafter, the Eligible Borrower cannot (i) repurchase any stock traded on a national exchange absent a contractual obligation, or (ii) make any dividends or distributions on its common stock
- None of the Borrower’s executives whose total compensation exceeded $425,000 in 2019 may receive any compensation increases (determined on a rolling 12-month basis) during the term of the loan or any severance that exceeds two times such executive’s 2019 compensation
- None of the Borrower’s executives whose total compensation exceeded $3 million in 2019 may receive, at any point during the term of the loan, total compensation (determined on a rolling 12-month basis) in excess of the sum of $3 million plus 50% of the executive’s 2019 compensation
In addition, while Eligible Loans for the New Loan Facility will be unsecured, any collateral securing an existing loan eligible for participation in the Expanded Loan Facility will continue to secure the upsized tranche.
Both the borrower and the lender will be required to make several certifications in connection with their participation in the Main Street Lending Program. Specifically, each Eligible Borrower will be required to certify that:
- It will refrain from using Eligible Loan funds to repay other loan balances and will not seek to reduce or cancel its loans or lines of credit with any lender. Other debt of equal or lower priority cannot be repaid during the term of the Eligible Loan, except for mandatory principal payments.
- It will make “reasonable efforts” to maintain its payroll and retain its employees.
- It meets the applicable EBITDA ratio condition based on the facility in which it is participating.
- It will comply with the distribution, stock repurchase, and executive compensation restrictions set forth in the CARES ACT and as described above.
- It is not affiliated with the president, his family members, or members of Congress.
Each Eligible Lender will be required to certify that:
- The proceeds loan (including the upsized tranche under the Expanded Loan Facility) will not be used to repay or refinance loans made by the Eligible Lender to the Eligible Borrower, including the pre-existing portion of any loan upsized under the Expanded Loan Facility.
- It will not cancel or reduce any existing lines of credit outstanding to the Eligible Borrower.
- It is eligible to participate under the conflicts of interest rules prohibiting the president, his family members, and members of Congress from participating.
How to Access Funds
As with PPP loans, businesses seeking Main Street funding will need to apply through banks and other lenders authorized to process the loans. The Federal Reserve has not yet announced when the Program will be operational, but Vice Chairman Randal Quarles, the Fed’s chief banking supervisor, told the press it would probably take two to three weeks for the Fed to get the program up and running through the banks.
Based on our experience with the PPP, we expect a similar rush of applications for Main Street funds. Now is the time to work with your BGW team to determine if these loans are right for you and, if so, begin assembling the documents you’ll need to apply. Eligible companies can receive funds from both the PPP and the Main Street program, but it is extremely important for those companies ineligible for PPP funds to explore this program.
Main Street loans have the following terms:
- A four-year term with principal and interest payments deferred for the first year.
- Adjustable interest rate based on the Secured Overnight Funds Rate plus 250-400 basis points
- Fees of 100 basis points of the Eligible Loan, payable from the Eligible Lender to the SPV under the New Loan Facility (which may be passed on to the Eligible Borrower); 100 basis points of the upsized principal amount of the Eligible Loan, payable from the Eligible Borrower to the Eligible Lender
- Prepayment permitted without penalty
- Eligible banks may originate new Main Street loans or use Main Street funding to increase the size of existing loans they have with businesses.
- New Main Street loans must be for at least $1 million and no more than the lesser of $25 million or an amount, when added to the borrower’s existing outstanding and committed but undrawn debt, four times the borrower’s 2019 earnings before interest, taxes, depreciation, and amortization (EBITDA).
- Main Street loans added to existing loans must be at least $1 million and no more than the lesser of $150 million, 30% of the borrower’s existing outstanding and committed but undrawn bank debt, or an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed six times the borrower’s 2019 EBITDA.
- Borrowers must make “reasonable efforts” to maintain their payroll and retain their employees during the term of the loan.
- Borrowers must commit to not using the funds to repay or refinance pre-existing loans and lines of credit.
Please reach out to us as you begin to consider these loans. We will let you know when applications become available.