The U.S. Treasury and the Board of Governors of the Federal Reserve Board announced yesterday the interim details of the $600 billion Main Street Lending Program which will provide financial support in the form of four-year loans to businesses employing up to 10,000 employees or with revenues of less than $2.5 billion. This program is authorized by the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, and is complementary to the Paycheck Protection Program and other SBA loan programs under the Act.

Under the Main Street Lending Program, banks will be able to make loans to small and mid-sized businesses and have those loans financed by the Federal Reserve by selling 95% of the loans into the program. As part of the program, two facilities will be created that will purchase up to $600 billion of loans — the Main Street New Loan Facility, for the origination of new loans, and the Main Street Expanded Loan Facility, for the expansion of existing loans.

Under both the New Loan Facility and Expanded Loan Facility, a Federal Reserve Bank will commit to lend to a single common special purpose vehicle, or SPV, on a recourse basis. The Federal Reserve’s SPV will purchase 95% participations in loans (or upsized tranches of loans), while lenders will retain 5% of each loan (or upsized tranche of loan). The Department of the Treasury will make a $75 billion equity investment in the SPV in connection with both facilities.

Borrowers participating in the Main Street Lending Program may only participate in one facility — either the New Loan Facility or the Expanded Loan Facility. Borrowers participating in either facility may not also participate in the Federal Reserve’s Primary Market Corporate Credit Facility, but they may participate in the SBA’s Paycheck Protection Program. Main Street loans are not eligible for forgiveness.

Who is an Eligible Lender?

Under both facilities, eligible lenders are:

• U.S. insured depository institutions;
• U.S. bank holding companies; and
• U.S. savings and loan holding companies.

Who is an Eligible Borrower?

A U.S. business with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues is eligible to participate if it has significant operations in and a majority of its employees based in the United States.

What is an Eligible Loan?

Loans under the New Loan Facility and upsized tranches under the Expanded Loan Facility must meet the following criteria:

• Term loan (which is unsecured under the New Loan Facility);
• Made by an eligible lender(s) to an eligible borrower;
• Originated on or after April 8, 2020 (loans being upsized under the Expanded Loan Facility must have been originated prior to April 8, 2020);
• 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
  • If participating in the New Loan Facility:
    • $25 million or
    • 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 earnings before interest, taxes, depreciation, and amortization (EBITDA)
  • If participating in the Expanded Loan Facility:
    • $150 million,
    • 30% of the borrower’s existing outstanding and committed but undrawn bank debt, or
    • 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 permitted without penalty.

How Will the SPV and Eligible Lenders Share the Risk?

The Federal Reserve’s SPV will purchase 95% participations in loans (or upsized tranches of loans), while lenders will retain 5% of each loan (or upsized tranche of loan). The SPV and the lender will then share risk on a pani passu basis.

Under the Expanded Loan Facility, any collateral securing a loan, whether that collateral was pledged under the original terms or the upsizing, will secure the loan participation on a pro rata basis. If the original loan was unsecured, the upsized tranche is unsecured.

Are There Additional Loan Requirements?

Yes, in addition to certifications required by applicable statutes and regulations, lenders and borrowers will each be required to certify that the entity is eligible to participate in the New Loan Facility or Expanded Loan Facility, including in light of the conflicts of interest prohibition in Title IV of the CARES Act (regarding businesses controlled by Members of Congress, certain Executive Branch officials, or their families). Section 13(3) of the Federal Reserve Act applies to the loans, including requirements relating to loan collateralization, taxpayer protection and borrower solvency.

A lender must attest that:

• the proceeds of the loan (or upsized tranche of loan) will not be used to repay or refinance pre-existing loans or lines of credit made by the lender to the borrower, including the pre-existing portion of the loan if participating in Expanded Loan Facility; and
• it will not cancel or reduce any existing lines of credit outstanding to the borrower.

A borrower must commit to refrain from using the loan (or upsized tranche of loan) to repay other loan balances and 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. Additionally, a borrower must attest that:

• it will not seek to cancel or reduce any of its outstanding lines of credit with the lender or any other lender;
• it requires financing due to the exigent circumstances presented by the coronavirus disease 2019 pandemic, and that, using the loan (or upsized tranche of loan), it will make reasonable efforts to maintain its payroll and retain its employees during the term of the loan;
• its existing outstanding and committed but undrawn debt does not exceed (a) four times its 2019 EBITDA under the New Loan Facility or (b) six times its 2019 EBITDA under the Expanded Loan Facility, as applicable;
• it will not pay dividends on its common stock or repurchase a listed equity security while the loan is outstanding unless pursuant to a contract in place prior to March 27, 2020; and
• for the period until one year after the date the loan is no longer outstanding, any officer or employee with 2019 total compensation of over $425,000 cannot receive increased compensation for any 12-month period or receive severance pay or other termination benefits of more than twice his or her 2019 total compensation, and any officer or employee whose 2019 total compensation was more than $3,000,000 cannot receive compensation greater than $3,000,000 plus 50% of the amount by which his or her 2019 total compensation exceeded $3,000,000.

The restrictions on compensation, stock repurchases and capital distributions are required by Article IV of the CARES Act and apply to the Treasury’s direct lending program as well.

What Fees Are Associated with the Facilities?

An origination (or upsizing) fee of 100 basis points of the principal amount of the loan (or upsized tranche of loan), which the borrower will pay the lender.

A servicing fee that the SPV will pay the lender of 25 basis points per annum of the principal amount of its participation in the loan (or upsized tranche of loan).

Under the New Loan Facility, a facility fee of 100 basis points of the principal amount of the loan participation purchased by the SPV. The lender will pay the facility fee to the SPV, but the lender may require the borrower to pay this fee.

When do the Facilities Terminate?

The SPV will cease purchasing participations in loans on September 30, 2020, unless the Federal Reserve Board and the Treasury Department extend the facilities. A participating Federal Reserve Bank will continue to fund the SPV after such date until the SPV’s underlying assets mature or are sold.

The Main Street Lending Program is not finalized and the details announced yesterday are subject to change. The Federal Reserve and the Department of the Treasury are seeking 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, 2020. When available, applications will be available from participating banks.