On April 9, the Federal Reserve announced additional actions it will take to provide up to $2.3 trillion, including as much as $600 billion in loans through the newly created Main Street Lending Program.
The program goal is to facilitate direct lending to small and medium-sized businesses (SMBs) by Eligible Lenders. As part of the response to the COVID-19 emergency, this lending facility is meant to support those SMBs who were in good financial standing prior to the pandemic, and who might not have access to broader capital markets or who do not qualify for the SBA’s Paycheck Protection Program (PPP).
The Federal Reserve Bank (“Reserve Bank”) will commit to lend to a single common special purpose vehicle (“SPV”) on a recourse basis. The Department of the Treasury, using funds appropriated to the Exchange Stabilization Fund under section 4027 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) has allocated $600 billion to the Program, and funds will be made available through two lending facilities, the Main Street New Loan Facility (MSNLF) and the Main Street Expanded Loan Facility (MSELF).
Who is an Eligible Borrower?
Eligible Borrowers are businesses with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues. For a full list of eligibility requirements, click here.
MSNLF and MSELF - Defined
There are two facilities available under the Main Street Lending Program, MSNLF and MSELF. The two facilities are summarized below (contact your Lurie advisor for specific details):
Main Street New Loan Facility (MSNLF)
- Maximum loan size is the lesser of $25 million or an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed 4x that borrower’s 2019 EBITDA
- MSNLF are new loans that originate on or after April 8, 2020.
Main Street Expanded Loan Facility (MSELF)
- Maximum loan size is $150 million for the MSELF, 30% of the borrower’s existing outstanding and committed but undrawn bank debt, or an amount that, when added to the borrower’s existing and outstanding and committed but undrawn debt, does not exceed 6x that borrower’s 2019 EBITDA.
- The MSELF allows banks to increase the size of an existing, outstanding loan issued prior to April 8, rather than initiate a new loan.
What is an Eligible Loan and Terms?
A Main Street New Loan (MSNLF) is an unsecured term loan made by an Eligible Lender(s) to an Eligible Borrower that was originated on or after April 8, 2020, provided that the new loan has the following features and terms:
4 year maturity;
Amortization of principal and interest deferred for one year;
Adjustable rate of SOFR + 250-400 basis points;
Minimum loan size of $1 million;
Maximum loan size that is the lesser of (i) $25 million or (ii) an amount that, when added to the 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”); and
Prepayment permitted without penalty
Eligible Lenders (Bank) Retain 5% of the Loan
Loan Participations: The SPV will purchase a 95% participation in an Eligible Loan at par value, and the Eligible Lender will retain 5% of the Eligible Loan. The SPV and the Eligible Lender will share risk.
Main Street Loan Program Requirements
There are additional requirements that apply to Main Street Program Loans. For example, the business must attest that it requires financing due to business disruptions caused by the COVID-19 outbreak. A few, but not all, are summarized here:
- Loans cannot be used to repay or refinance existing borrower debt.
- Borrower must refrain from using proceeds to pay off other debt.
- Lender cannot cancel or reduce existing lines of credit available to the borrower.
- Until 12 months after the loan is paid off, borrowers cannot buy back stock unless already contracted to do so.
- Until 12 months after the loan is paid off, the borrower cannot make a distribution.
- Officer or employee compensation of $425k in calendar year 2019, they can’t exceed $425,000.
- If officers or employees with total compensation > $3 million in 2019, they shall not receive total compensation over $3 million + 50% of the excess over $3 million of what was received in calendar year 2019.
Application Fees and Process
- Facility Fee: An Eligible Lender will pay the SPV a facility fee of 100 basis points of the principal amount of the loan participation purchased by the SPV. The Eligible Lender may require the Eligible Borrower to pay this fee.
- Loan Origination and Servicing: An Eligible Borrower will pay an Eligible Lender an origination fee of 100 basis points of the principal amount of the Eligible Loan. The SPV will pay an Eligible Lender 25 basis points of the principal amount of its participation in the Eligible Loan per annum for loan servicing.
- Facility Termination: The SPV will cease purchasing participations in Eligible Loans on September 30, 2020, unless the Board and the Treasury Department extend the Facility. The Reserve Bank will continue to fund the SPV after such date until the SPV’s underlying assets mature or are sold.
Can You Have More Than One Loan?
There are many government-backed loan options available to businesses that are impacted by COVID-19. As more programs are rolled out, it is important to note which loans can or cannot be combined, and what you can use the loans for. The guidance and rules are being updated continuously, so please consult your Lurie advisor or lender in regards to your specific situation.
As of 4/15, the general guidance is as follows:
- Businesses can obtain both a PPP loan and the Main Street Loan.
- Businesses cannot participate in both Main Street New Loan Facility (MSNLF) and the Main Street Expanded Loan Facility (MSELF).
- Businesses that participate in the Main Street Lending Program cannot participate in the Primary Market Corporate Credit Facility.
- Businesses cannot use loan proceeds to repay other loan balances, except for mandatory principal payments.
- Borrower will not seek to cancel or reduce any of its outstanding lines of credit with the Main Street Lending Program lender or any other lender.
As of April 13, further details on the start date of the Main Street Loan Program have not yet been released. We anticipate further information to be released soon, likely after the feedback request window has closed on April 16. We will update when we know more.
Officially, The Federal Reserve and the Treasury: “recognize that businesses vary widely in their financing needs, particularly at this time, and, as the program is being finalized, will continue to seek input from lenders, borrowers, and other stakeholders to make sure the program supports the economy as effectively and efficiently as possible while also safeguarding taxpayer funds. Comments may be sent to the feedback form until April 16.”