A Closer Look at the Main Street Loan Program

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Buckingham, Doolittle & Burroughs, LLC

The Federal Reserve Board has implemented a special Main Street Loan Program for the purpose of providing further financial assistance to U.S. businesses adversely impacted by the COVID-19 pandemic. These loans may be utilized in addition to PPP loans.

The jury is still out as to how effective this program will be. While the Borrower size limits are much less restrictive than the PPP loans, the loan underwriting standards are more strict and there is no loan forgiveness. Borrowers who had financial difficulty prior to the pandemic may not be eligible for a Main Street loan. These loans are supposed to address financial issues arising during the pandemic and not pre-existing financial distress. Since the loan rate is set by the program and the Lender retains a portion of the loan exposure, it will be interesting to see how Lenders react to the program interest rate. Like the PPP loan program, Borrowers and Lenders can expect further “clarifications” as we go forward.

The Lenders will be the “gatekeepers” for the Main Street loans. Interested potential Borrowers should contact their existing lenders to see if the program can assist in obtaining additional credit or possibly a lower interest rate than the lender might otherwise offer.

Eligible Borrowers:

  • U.S. for-profit entities established prior to March 13, 2020,with significant operations in, and a majority of employees based in, U.S.
  • In 2019, had no more than 15,000 employees or had no more than $5 billion in revenue.
  • Except for SBA size limits (replaced with above), business is otherwise eligible for SBA loans. Can these requirements be summarized?
  • Did not receive certain special CARES Act assistance. PPP loan recipients are eligible.
  • Must have been in sound financial condition prior to the onset of the pandemic.

Loan Structure:

Lenders originate the Main Street loans and the Federal Reserve Board (FRB), through a special purpose entity, purchases a participation in the loan. The Lender retains part of the loan and services the loan. There are three types of Main Street loans:

Loan Type Loan Amount FRB Participation
New Loan Facilities (NLFs) Min: $500,000

Max. $25,000,000*

95%
Priority Loan Facilities (PLFs) Min: $500,000

Max. $25,000,000*

85%
Expanded Loan Facilities (ELFs) Min: $10,000,000

Max.: $200,000,000**

95%
*Actual maximum is lesser of (a) $25,000,000 or (b) 4 times 2019 EBITDA for NLFs or 6 times 2019 EBITDA for PLFs.

**Actual maximum is lesser of $200,000,000 and lesser of (a) 35% of outstanding debt (including undrawn but available debt) or (b) an amount that, when added to all Borrower’s existing debt (including undrawn but available debt), does not exceed 6 times 2019 EBITDA.

Term and Rate:

All Main Street Loans are four-year term loans with a variable interest rate of LIBOR +3% (currently using one-month LIBOR is 3.17%). Principal and interest payments are deferred for the first year. Main Street loans may not be subordinate in payment priority to other Borrower loans. NLFs and PLFs are new loans. ELFs are expansions of existing loan facilities already made by the Lender to the Borrower. All loans are full recourse loans. There is no loan forgiveness in the program.

Collateral:

NLF loans may be unsecured or secured on a junior basis to collateral securing other borrower loans.  PLF loans must be either senior to or on parity as to collateral priority with other borrower loans. ELF loans must be secured in a manner typical for the Lender for the type of loan being made.

Use of Proceeds:

Current FRB guidance provides for no limits on the use of proceeds except that refinancings are limited as follow:

  • Main Street Loans cannot be used to directly refinance current loans made by the Main Street lender to the Borrower.
  • Only PLFs may be used to refinance current loans owed to other lenders.

Program Expiration Date:  September 30, 2020.

For more information and questions regarding the Main Street Loan Program, please contact Business Partner, Steve Hammersmith, at [email protected]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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