On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a $2 trillion stimulus package thought to be the largest in U.S. history. The CARES Act expands or establishes multiple loan programs for qualifying businesses. This alert focuses on the new, up to $600 billion Main Street Lending program established under the CARES Act. The purpose of the Main Street lending program is to facilitate lending to small or medium sized businesses meeting the eligibility requirements through new term loan facilities or expansions of existing loan facilities. The Federal Reserve Bank will create a special purpose vehicle (SPV) that will purchase, on a recourse basis, 95 percent participations in qualifying loans made under this program, up to $600 billion in total principal amount. The SPV may purchase participations in eligible loans on or prior to September 30, 2020, unless the program is extended.

Eligible Borrowers: Businesses with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues. Borrowers 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 will also need to have positive earnings before interest, taxes, depreciation, and amortization (EBITDA) for calendar year 2019 (see loan terms and maximum loan size below).

Eligible Lenders: U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies. The limitation to U.S. entities may create difficulties for Eligible Borrowers which have existing credit facilities with one or more non-U.S. lenders.

Loan Terms:

• 4-year maturity
• Amortization of principal and interest deferred for one year
• Adjustable rate of the Secured Overnight Financing Rate (SOFR) + 250-400 basis points
• Minimum loan size of $1 million
• Maximum loan size for a new loan facility 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 Borrower's 2019 EBITDA. The maximum loan size for upsized loans with existing credit facilities is the lesser of (i) $150 million, (ii) 30 percent of the eligible borrower's existing outstanding and committed but undrawn bank debt, or (iii) an amount that, when added to the eligible borrower's existing outstanding and committed but undrawn debt, does not exceed six times the eligible borrower's 2019 EBITDA. It is not clear whether any standard EBITDA adjustments will be permitted.
• Prepayment without penalty is allowed.
• The terms do not appear to require collateral but provide that collateral securing existing loans will be shared with the new upsized facility on a pari passu basis.

Fees:

The Eligible Lender will pay a 100 basis point facility fee to the SPV (which it may require the Eligible Borrower to pay). 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.

Required Attestations:

• The Eligible Lender must attest that the proceeds of the Eligible Loan will not be used to repay or refinance pre-existing loans or lines of credit made by the Eligible Lender to the Eligible Borrower.
• Eligible Borrower must commit to refrain from using the proceeds of the Eligible Loan to repay other loan balances. The Eligible Borrower must commit to refrain from repaying other debt of equal or lower priority, with the exception of mandatory principal payments, unless the Eligible Borrower has first repaid the Eligible Loan in full.
• The Eligible Lender must attest that it will not cancel or reduce any existing lines of credit outstanding to the Eligible Borrower. The Eligible Borrower must attest that it will not seek to cancel or reduce any of its outstanding lines of credit with the Eligible Lender or any other lender.
• The Eligible 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 Eligible Loan, it will make reasonable efforts to maintain its payroll and retain its employees during the term of the Eligible Loan.
• The Eligible Borrower must attest that it meets the EBITDA leverage condition stated above.
• The Eligible 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. (See Restrictions on Borrowers below.)
• Eligible Lenders and Eligible Borrowers will each be required to certify that the entity is eligible to participate in the Facility, including in light of the conflicts of interest prohibition in section 4019(b) of the CARES Act. The conflicts of interest provisions provide that any business that is directly or indirectly owned by the president, senior executive branch officials or members of congress (or their family members) is prohibited from participating in CARES Act programs. In effect, an Eligible Borrower will have to make sure that none of these persons holds an equity stake of 20 percent or greater in the Eligible Borrower.

Restrictions on Borrower:

Under Section 4003(c)(3)(A)(ii) of the CARES Act, an Eligible Borrower must agree to the following restrictions:

• Stock Repurchases. Until the date 12 months after the date on which the direct loan is no longer outstanding, an Eligible Borrower may not repurchase an equity security that is listed on a national securities exchange of such Eligible Borrower or any parent company of such Eligible Borrower while the direct loan is outstanding, except to the extent required under a contractual obligation that is in effect as of the date of enactment of the CARES Act.
• Dividends and Distributions. Unless waived by the U.S. Treasury, until the date 12 months after the date on which the direct loan is no longer outstanding, an Eligible Borrower may not pay dividends or make other capital distributions with respect to its common stock.
• Limitations on Compensation. During the period beginning on the date on which the loan agreement is executed and ending on the date that is one year after the date on which the loan or loan guarantee is no longer outstanding:
  • no officer or employee of the Eligible Borrower whose total compensation exceeded $425,000 in calendar year 2019 (other than an employee whose compensation is determined through an existing collective bargaining agreement entered into before March 1, 2020):
    • will receive from such Eligible Borrower total compensation which exceeds, during any 12 consecutive months of such period, the total compensation received by such officer or employee from such Eligible Borrower in calendar year 2019; or
    • will receive from such Eligible Borrower severance pay or other benefits upon termination of employment with such Eligible Borrower which exceeds twice the maximum total compensation received by such officer or employee from such Eligible Borrower in calendar year 2019; and
  • no officer or employee of such Eligible Borrower whose total compensation exceeded $3,000,000 in calendar year 2019 may receive during any 4 consecutive months of such period total compensation in excess of the sum of (A) $3,000,000 plus (B) 50 percent of the excess over $3,000,000 of the total compensation received by such officer or employee from such Eligible Borrower in calendar year 2019.

"Total compensation" includes salary, bonuses, awards of stock, and other financial benefits provided by an Eligible Borrower to an officer or employee of such Eligible Borrower.

Next Steps

The Federal Reserve has published term sheets for new loan facilities and expanded loan facilities on its website and has indicated that it may make adjustments to the terms and conditions described in the term sheets. Interested parties may comment on these programs through April 16, 2020.