On April 9, 2020, the Federal Reserve Board released details about its previously announced Main Street Lending Program geared to assist small and medium sized businesses deal with the economic fallout caused by the COVID-19 pandemic.

Enabled under The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Main Street Lending Program offers qualified borrowers the opportunity to obtain a four (4) year unsecured term loan with principal and interest payments deferred for one year. Businesses that have already taken a loan under the U.S. Small Business Administration’s Paycheck Protection Program are not excluded from also taking a loan under the Main Street Lending Program.

Here are the details of the Main Street Lending Program as announced by the Federal Reserve Board on April 9:

Who is eligible?

• businesses with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues
• must be a business created or organized in the United States or under the laws of the United States with significant operations in and a majority of its employees based in the United States

Who is the lender?

• loans may be made by U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies
• a special purpose vehicle created by a Federal Reserve Bank (the “SPV”) will purchase a 95% participation in loans made under the Main Street Lending Program and the lender will retain 5% of the loan made under the Main Street Lending Program. The SPV will cease purchasing participations in loans made under the Main Street Lending Program on September 30, 2020 unless the Federal Reserve Board and the Treasury Department extend the Main Street Lending Program.

What are the terms of the loans?

• minimum loan size is $1 million
• maximum loan size is the lesser of (i) $25 million, or (ii) an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed four (4) times the borrower’s 2019 earnings before interest, taxes, depreciation and amortization (“EBITDA”)
• four (4) year maturity
• principal and interest payments deferred for one (1) year
• adjustable interest rate of Secured Overnight Financing Rate (SOFR) plus 2.50% to 4.00%
• prepayment permitted without penalty
• origination fee of 1% of the principal amount of the loan paid to the lender
• lender will pay the SPV a facility fee of 1% of the principal amount of the loan participation purchased by the SPV; the lender may require the borrower to pay this fee

What other requirements are there for the loans?

• borrower must commit to refrain from using the proceeds of the loan to repay other loan balances
• borrower must commit to refrain from repaying other debt of equal or lower priority, with the exception of mandatory principal payments, unless the borrower has first repaid the loan in full
• borrower must attest that it will not seek to cancel or reduce any of its outstanding lines of credit with lender, if any, or any other lender
• borrower must attest that it requires financing due to the exigent circumstances presented by the COVID-19 pandemic, and that, using the proceeds of the loan, it will make reasonable efforts to maintain its payroll and retain its employees during the term of the loan
• borrower must attest that it meets the EBITDA leverage condition required for eligibility for the loan
• borrower must attest that it will follow compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act

It is important to note that, in releasing details on the Main Street Lending Program, the Federal Reserve Board stated that the Board of Governors of the Federal Reserve System and the Secretary of the Treasury may make adjustments to the terms and conditions of the Main Street Lending Program announced on April 9. We will continue to monitor this new loan program and any additional guidance received from the Federal Reserve Board.

For more information on the CARES Act and guidance during concerning the impacts of the COVID-19 crisis, please visit our website. Pullman & Comley attorneys have been closely monitoring the many developing implications of the COVID-19 pandemic for businesses and for professionals, including law firms. We have been responding, and will continue to respond, to a wide range of risk management questions. The firm’s FOCUS page for the latest COVID-19 advisories may be found here.

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