On April 9, 2020, the Federal Reserve and Treasury announced a package of new financial assistance programs to provide up to $2.3 trillion in loans to support the U.S. economy pursuant to its own authority and the Coronavirus Aid, Relief and Economic Security Act of 2020 (the CARES Act). Of particular interest to small and medium size businesses exploring their financing alternatives to combat liquidity issues caused by the coronavirus pandemic is a new $600 billion Main Street Lending Program (the Program).
The Program is in addition to the other financial assistance options available to businesses under the CARES Act (see summary), which include the $349 billion Paycheck Protection Program (the PPP) for small businesses, and a program under to assist medium sized businesses with up to $500 billion in direct loans, loan guarantees and other investments. While some of the requirements to obtain financing under the other CARES Act programs also apply to this Program, others do not, making this Program a potentially attractive option for eligible borrowers considering their options.
Although the Program is open for comment, and additional details are expected to follow, the Federal Reserve has published a term sheet outlining the following details of the Program.
Program summary. Under the Program, the Federal Reserve will create two new loan facilities of up to $600 billion in the aggregate. Eligible banks may originate new loans or use loans under the Program to increase the size of existing loans to businesses. A Federal Reserve Bank will commit to lend to a single common special purpose vehicle (the SPV) on a recourse basis. The SPV will purchase 95% participations in eligible loans from eligible lenders at par value, and eligible lenders would retain 5% of each eligible loan. Treasury, using funds appropriated to the Exchange Stabilization Fund under the CARES Act, will make a $75 billion equity investment in the SPV in connection with the program.
Eligible lenders. Eligible lenders under the Program are U.S. insured depository institutions, U.S. bank holding companies and U.S. savings and loan holding companies.
Eligible borrowers. Eligible borrowers are small and medium U.S. businesses (i.e., businesses with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues). Each eligible borrower must be a business that is 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. Borrowers may not participate in both facilities created under the Program, nor may they participate in the Primary Market Corporate Credit Facility, which is also part of $2.3 billion package announced on April 9, 2020 to serve as a funding backstop for corporate debt issued by certain issuers.
Eligible loans. Loans eligible for the Program have the following features:
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Loan type
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Unsecured term loan
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Origination date
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On or after April 8, 2020
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Maturity
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4 years
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Deferral
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Amortization of principal and interest deferred for one year
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Interest rate
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SOFR plus 250-400 bps
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Loan size
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Between $1 million and the lesser of (x) $25 million and (y) 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
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Prepayment penalty
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None
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Required attestations. The following attestations will be required for each eligible loan:
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Borrower attestations
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- The borrower requires financing due to the exigent circumstances presented by the coronavirus 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;
- The borrower 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, specifically:
- For one year after the loan is no longer outstanding, (x) total compensation of employees who made over $425,000 in 2019 will be capped at 2019 levels, and severance will be capped at 2x 2019 compensation and (y) total compensation of employees (if any) who made over $3 million in 2019 will be capped at $3 million plus one-half of any amounts over $3 million that the employee made in 2019;
- Until 12 months after the loan is no longer outstanding, the applicant may not buy back an equity security listed on a national securities exchange of the eligible business or any parent company thereof (unless required under a prior contractual obligation); and
- Until 12 months after the loan is no longer outstanding, the applicant may not pay dividends on, or make other capital distributions with respect to, common stock or shares.
Note: While Treasury may waive these requirements under the CARES Act, there is no express waiver authority granted under this Program.
- The borrower must refrain from using the proceeds of the loan to repay other loan balances. The borrower must 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;
- The borrower will not seek to cancel or reduce any of its outstanding lines of credit with the lender or any other lender;
- The borrower meets the EBITDA leverage condition stated above;
- The borrower is eligible to participate in the Program, including in light of the conflict of interest prohibition in Section 4019(b) of the CARES Act, which prohibits certain governmental officials from participating in various federal lending programs.
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Lender attestations
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- The proceeds of the loan will not be used to repay or refinance pre-existing loans or lines of credit made by the lender to the borrower;
- The lender will not cancel or reduce any existing lines of credit outstanding to the borrower; and
- The lender is eligible to participate in the Program, including in light of the conflict of interest prohibition in Section 4019(b) of the CARES Act, which prohibits certain governmental officials from participating in various federal lending programs.
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Differences with the CARES Act program for mid-sized businesses and the PPP. Some borrowers may have the option of participating in multiple CARES Act programs. In making decisions on how to proceed, they will need to carefully evaluate the differences between this Program and any direct loan program established under the CARES Act or the PPP.
Notably, although this Program retains the compensation, stock repurchase, and capital distribution restrictions of the mid-sized direct lending program established under Title IV of the CARES Act, it does not impose certain other conditions of the Title IV program, including, among others, the requirements that the borrower will not outsource offshore jobs, will not abrogate existing collective bargaining agreements and will remain neutral in any union organizing effort for the term of the loan. On the other hand, the Title IV program offers a more attractive interest rate of 2% or lower, versus this Program’s interest rate of SOFR plus 250-400 bps.
Similarly, as compared to the PPP, the maximum loan sizes are different (i.e., there is a $10 million cap under the PPP, and a $25 million cap under this Program) and conditions for this Program are different than under the PPP (e.g., the restrictive affiliation rules for small business imposed by the Small Business Administration are not applicable here, and the use of funds is less restricted). On the other hand, under this Program there is no opportunity for loan forgiveness (one year deferral only), and the interest rate is higher (the interest rate for PPP loans that are not forgiven is 1%).
Facility fee. The lender must pay the SPV a facility fee of 100 basis points of the principal amount of the loan participation purchased by the SPV. The lender may require the borrower to pay this fee.
Loan origination and servicing. The borrower will pay the lender an origination fee of 100 basis points of the principal amount of the loan. The SPV will pay the lender 25 basis points of the principal amount of its participation in the 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 Program. The Reserve Bank will continue to fund the SPV after such date until the SPV’s underlying assets mature or are sold.
We will continue to monitor developments with respect to this Program, and will provide ongoing advice as additional information becomes available.
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