The Main Street Lending Program
Many businesses have found themselves too large to qualify for a Paycheck Protection Program (“PPP”) loan as established under The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), signed into law on March 27, 2020. However, Congress also designed the CARES Act to stimulate other relief programs. Among other things, the CARES Act allocated $454 billion for the Department of the Treasury to use for Federal Reserve programs aimed at providing liquidity to the financial system. One such program, which may offer hope to businesses that are too large for the PPP, is the Main Street Lending Program. Businesses are not yet able to receive loans under this program. However, the Federal Reserve recently released term sheets outlining the Main Street Lending Program, and practitioners expect additional guidance from the Federal Reserve after the public comment period closes on April 16, 2020.
What is the Main Street Lending Program?
The Main Street Lending Program is authorized by Section 13(3) of the Federal Reserve Act, which provides the Federal Reserve with greater lending authority in emergency situations (and which the Federal Reserve used extensively in responding to the 2008 financial crisis). Thus, the CARES Act seeks to bolster the Federal Reserve’s pre-existing authority by allocating money to help fund authorized programs such as the Main Street Lending Program. The Main Street Lending Program will comprise two related but distinct credit facilities – the Main Street Expanded Loan Facility (the “Expanded Facility”) and the Main Street New Loan Facility (the “ New Facility”, together with the Expanded Facility, the “Main Street Loans”). The Expanded Facility applies to existing loans that were originated before April 8, 2020. The New Facility applies to loans that were originated on or after April 8, 2020. All Main Street Loans will be funded through commercial lenders. Thus, the Federal Reserve must incentivize eligible lenders to (a) increase the size of certain existing term loans and (b) issue new term loans to businesses that do not have loans under the Expanded Facility. Importantly, unlike PPP loans, Main Street Loans will not be forgivable.
Which Lenders are Eligible to Participate?
U.S. insured depository institutions, U.S. bank holding companies and U.S. savings and loan holding companies will all be eligible to issue Main Street Loans.
How will the Federal Reserve Support Eligible Lenders?
First, the Federal Reserve will create a special purpose vehicle (the “Fed SPV”). Then, the Treasury Department will take $75 billion of the $454 billion allocated under the CARES Act, and it will invest that $75 billion into the Fed SPV. The Federal Reserve will then commit to providing additional capital to the Fed SPV such that the Fed SPV will ultimately have access to $600 billion. The Fed SPV will then contract with lenders, acquiring a participation interest in Main Street Loans in exchange for funding 95% of the principal amount of such loans. This arrangement would likely be set out in a participation agreement between the Fed SPV and the lender. Thus, borrowers would only interact directly with the lender, not with the Fed SPV.
How will Lenders Issue Loans under the New Facility?
Further guidance is likely forthcoming. However, it appears that lenders will be able to issue new loans using their own loan documents, subject to the terms and conditions described below.
How will Lenders Issue Loans under the Expanded Facility?
Again, further guidance is likely forthcoming. However, these loans would likely be styled as amendments or restatements of existing loan agreements between the lender and the borrower. Thus, loans issued under the Expanded Facility would “upsize” pre-existing loans.
Where Must a Borrower be Located?
Generally, a borrower under the Main Street Lending Program must be a business that is created or organized in the U.S. or under the laws of the U.S., with significant operations and a majority of its employees based in the U.S. Further guidance may clarify whether or not a U.S. borrower that is a subsidiary of a foreign parent qualifies.
Are there any Size Limits on Borrower?
Yes, but the size limits are much higher than under the PPP. To be eligible for a Main Street Loan, borrowers must have no more than (a) 10,000 employees or (b) $2.5 billion in 2019 annual revenue.
Can a Borrower Take Out Loans Under Both the Expanded Facility and the New Facility?
No. Borrowers may not participate in both Main Street facilities. However, a Borrower may participate in one of the Main Street facilities even if the Borrower has already obtained a PPP loan.
What are the Required Loan Terms of the Main Street Loans?
Below are the required loan terms for Main Street Loans. Unless otherwise noted, the required terms are the same for both Expanded Facility loans and New Facility loans.
- Term: 4 years.
- Interest Rate: Adjustable rate, based on the Secured Overnight Financing Rate (the “SOFR”) plus an extra 2.5% to 4%.
- New Facility loans will be unsecured.
- Lenders appear to have discretion regarding Expanded Facility loans. Any collateral securing an Expanded Facility loan (whether pledged under the original loan or at the time of loan upsizing) will secure the Expanded Facility loan on a pari passu basis.
- Deferred Payment: Amortization of principal and interest will be deferred for one year.
- Interest Accrual: Interest accrues from the loan date.
- New Facility Loans: (1) Lender will pay the Fed SPV a Facility Fee of 1% of the principal amount of the loan participation purchased by the Fed SPV; (2) Borrower will pay lender an Origination Fee of 1% of the principal amount of the loan and (3) Fed SPV will pay the lender a Servicing Fee of 0.25% of the principal amount of its participation in the loan per annum.
- Expanded Facility Loans: (1) Borrower will pay lender a Loan Upsizing Fee of 1% of the principal amount of the upsized tranche of the loan at the time of upsizing; and (2) Fed SPV will pay the lender a Servicing Fee of 0.25% of the principal amount of its participation in the upsized tranche of the loan per annum.
- Minimum Loan Amount: $1 million.
- Maximum Loan Amount:
- New Facility Loans: Lesser of (1) $25 million or (2) an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed four times the borrower’s 2019 EBITDA.
- Expanded Facility Loans: Lesser of (1) $150 million, (2) 30% of the borrower’s existing outstanding and committed but undrawn bank debt or (3) 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.
- Prepayment Penalty: None.
- Facility Termination: The Fed SPV will cease purchasing participations in eligible loans on September 30, 2020, unless the Federal Reserve and the Treasury Department extend the facilities. The Federal Reserve will continue to fund the Fed SPV after such date until the Fed SPV’s underlying assets mature or are sold.
What Certifications Must Borrowers Make?
Both the Federal Reserve term sheets and the CARES Act impose significant operating restrictions on companies that borrow under the Main Street Lending Program. Whether applying for an Expanded Facility loan or a New Facility loan, a borrower must certify as follows:
- That it needs the loan due to the exigent circumstances presented by the COVID-19 pandemic and that it will use the proceeds of the loan to make reasonable efforts to maintain payroll and retain employees for the term of the loan.
- That it will use the loan proceeds to retain at least 90% of its workforce at full compensation and benefits through September 30, 2020.
- That it intends to restore not less than 90% of its workforce that existed before February 1, 2020, and to restore all compensation and benefits to its workers no later than four months after the termination date of the public health emergency declared by the Secretary of Health and Human Services on January 31, 2020.
- That it is organized in the U.S. or under the laws of the U.S. and has significant operations and a majority of its employees based in the U.S.
- That it is not a debtor in a bankruptcy proceeding.
- That it will not pay dividends with respect to its common stock or repurchase an equity security of itself or any parent entity that is listed on a national securities exchange while the loan is outstanding, except to the extent required under a contractual obligation in effect as of March 27, 2020. Note that separate provisions of the CARES Act appear to extend these restrictions until twelve months after the date on which the loan is no longer outstanding. Forthcoming guidance may clarify this inconsistency.
- That it will comply with the executive compensation limitations set forth in Section 4004 of the CARES Act, which are described below and which extend for the loan term and for a period of twelve months after the loan term.
- No employee who earned over $425,000 in 2019 may receive (1) total compensation exceeding 2019 total compensation or (2) severance payments in excess of two times 2019 total compensation.
- An employee with 2019 compensation over $3 million is limited to a 50% increase in total compensation as compared to 2019 total compensation. (Further guidance may clarify apparent inconsistencies between this limit and the limit described above).
- “Total Compensation” includes salary, bonuses, awards of stock and other financial benefits provided by the business to an officer or employee.
- That it will not outsource or offshore jobs for the term of the loan and for two years after completing repayment of the loan.
- That it will not abrogate existing collective bargaining agreements for the term of the loan and for 2 years after completing repayment of the loan.
- That it will remain neutral in any union organizing effort for the term of the loan.
- That it will refrain from using the proceeds of the loan to repay other loan balances.
- That it will not repay other debt of equal or lower priority (except for mandatory principal payments) unless the Main Street Loan has been repaid in full.
- That it will not seek to cancel or reduce any of its outstanding lines of credit with the Main Street lender or any other lender.
- That (if applicable) it meets the EBITDA leverage conditions used to determine maximum loan size.
- That it is eligible to participate in the Main Street Lending Program, including with respect to the conflicts of interest prohibition in Section 4019(b) of the CARES Act (i.e., the section of the CARES Act prohibiting participation by members of the Trump Administration and their family members).
What Certifications Must Lenders Make?
The Federal Reserve term sheets also require each participating lender to certify as follows:
- That the proceeds of the upsized loan or the new loan will not be used to repay or refinance pre-existing loans or lines of credit made by the lender to the borrower, including any pre-existing portion of an upsized loan.
- That it will not cancel or reduce any existing lines of credit outstanding to the borrower.
- That it is eligible to participate in the Main Street Lending Program, including with respect to the conflicts of interest prohibition in Section 4019(b) of the CARES Act.
Will Main Street Loans Conflict with the Terms of Other Loans?
Possibly. For example, an upsized loan or a new loan under the Main Street Lending Program may cause borrowers to exceed leverage caps or violate prohibitions on additional indebtedness in their existing loan agreements. Thus, borrowers may need their existing lenders to consent to the new transactions. Borrowers should review their existing loan agreements and discuss with their existing lenders. Existing lenders may be warier of Main Street Loans than they are of PPP loans given that Main Street Loans are not forgivable.
How Can Eligible Borrowers Apply for a Main Street Loan?
Borrowers likely will not be able to apply until the Federal Reserve issues further guidance after the comment period closes on April 16, 2020. After that, lenders will likely need time to implement processes to issue Main Street loans. Nevertheless, it may be wise for potential borrowers to begin talking to their lenders now.
This Alert was prepared by Michael Rebagliati and Stephen McKay. Please contact them with any questions.
Karr Tuttle Campbell | 206-223-1313 | www.karrtuttle.com