The Federal Reserve Board on Thursday announced it is expanding the scope and eligibility for the Main Street Lending Program, the $600 billion program of financial assistance to small and medium-sized businesses authorized under Title IV of the CARES Act. See our previous Client Alert on the Main Street Lending Program Federal Reserve Announces Funding for Main Street Lending Program and Other Actions to Bolster the Economy - April 9, 2020.
In response to public input, the Board expanded the loan options available to businesses, and increased the maximum size of businesses that are eligible for support under the program. The key changes include:
• Creating a third loan facility (Priority Loan Facility) with increased risk sharing (15% vs. 5% for other Main Street loan facilities) by Eligible Lenders for Eligible Borrowers with greater leverage.
• Expanding the pool of eligible businesses. Businesses with up to 15,000 employees or up to $5 billion in 2019 annual revenue are now eligible for loans, compared to the initial program, which was limited to businesses with up to 10,000 employees and $2.5 billion in 2019 annual revenue.
• Lowering the minimum loan size for loans under the New Loan Facility and the Priority Loan Facility to $500,000 from $1 million, but increasing the minimum loan size under the Expanded Credit Facility to $10 million from $1 million previously.
The program now features three loan options - the previously announced New Loan Facility and Expanded Loan Facility, plus the new Priority Loan Facility. As before, an Eligible Borrower must choose under which facility to borrow, but can borrow under one of these facilities even if it has received funding under the Paycheck Protection Program. The program will be administered by the Federal Reserve Bank of Boston, which will set up the Special Purpose Vehicle (SPV) that will purchase loans in any of the 12 Federal Reserve districts.
Under all of the Eligible Loan options, Eligible Lenders must apply their own underwriting standards to measure an Eligible Borrower's income and whether to make the loan, and can require additional information and documentation. No loan application has been provided; the Fed directs potential borrowers to contact an Eligible Lender for more information on the application process. Further information regarding the official launch date, credit administration and loan servicing will be made available on the Fed's website at a later date.
The chart below, prepared by the Fed, summarizes the different loan options:
|Main Street Lending
Program Loan Options
|Minimum Loan Size
|Maximum Loan Size
||Lesser of $25M or 4x 2019 adjusted EBITDA
||Lesser of $25M or 6x 2019 adjusted EBITDA
||Lesser of $200M, 35% of outstanding and undrawn available debt, or 6x 2019 adjusted EBITDA
|Payment (year one deferred for all)
||Years 2-4: 33.33% each year
||Years 2-4: 15%, 15%, 70%
||Years 2-4: 15%, 15%, 70%
||LIBOR + 3%
||LIBOR + 3%
||LIBOR + 3%
1. New Loan Facility:
a. Eligible Lenders: Eligible Lenders now include a U.S. branch or agency of a foreign bank and a U.S. intermediate holding company of a foreign banking organization. Previously, only a U.S. federally insured depository institution (including a bank, savings association, or credit union), a U.S. bank holding company, or a U.S. savings and loan holding company was eligible. A U.S. subsidiary of any of the foregoing is now also included. Non-bank financial institutions, however, are not eligible.
b. Eligible Borrowers: An Eligible Borrower must be a "Business" established prior to March 13, 2020. Business is defined as "an entity that is organized for profit as a partnership; a limited liability company; a corporation; an association; a trust; a cooperative; a joint venture with no more than 49 percent participation by foreign business entities; or a tribal business concern." Nonprofits are not eligible for loans under these facilities. The Fed, however, said it was evaluating a separate approach for nonprofit organizations.
As previously required, the borrower must have been 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. The 15,000 maximum number of employees is determined pursuant to the same SBA affiliation regulations applicable to Paycheck Protection Program loans. In determining the $5 billion maximum revenue number, an Eligible Borrower must aggregate revenue with its affiliates.
Businesses that are ineligible under SBA guidelines as modified by the Paycheck Protection Program are ineligible under this program as well. In addition, businesses that received assistance under other provisions of Title IV of the CARES Act (air carriers and related businesses and businesses essential to national security) are not eligible for loans under any of the facilities of the Main Street program.
c. Eligible Loans: An Eligible Loan now is defined as a secured or unsecured term loan originated after April 24, 2020. The 4-year maturity requirement was retained and well as the deferral of principal and interest payments for one year, but the term sheet clarifies that unpaid interest will be capitalized. The interest rate is now LIBOR (1 or 3 month) + 300 basis points, versus SOFR + 250 - 400 basis points previously. Principal amortization for loans under the New Loan Facility is one-third at the end of the second year, one-third at the end of the third year, and one-third at maturity at the end of the fourth year. As before, prepayment is permitted without penalty. None of the loans under the Main Street facilities is forgivable.
In addition, the Eligible Loan may not, at the time of origination or at any time during the term of the loan, be contractually subordinated in terms of priority to any of the Eligible Borrower’s other loans or debt instruments. To assure that the Eligible Borrower was in sound financial condition prior to the onset of the COVID-19 pandemic, if the Eligible Borrower had other loans outstanding with the Eligible Lender as of December 31, 2019, such loans must have had an internal risk rating equivalent to a “pass” in the Federal Financial Institutions Examination Council’s supervisory rating system on that date.
d. Loan Participations: As before, the SPV established under the program will purchase at par value a 95% participation in the Eligible Loan. The SPV and the Eligible Lender will share risk in the Eligible Loan on a pari passu basis. The Eligible Lender must retain its 5% of the Eligible Loan until it matures or the SPV sells all of its participation, whichever comes first. The sale of the 95% participation in the Eligible Loan to the SPV will be structured as a “true sale” and must be completed expeditiously after the Eligible Loan’s origination.
e. Required Lender Certifications and Covenants: The New Loan Facility term sheet adds new certifications and covenants that will be required from Eligible Lenders, among which are:
i. The Eligible Lender must not request that the Eligible Borrower repay debt extended by the Eligible Lender to the Eligible Borrower, or pay interest on such outstanding obligations, until the Eligible Loan is repaid in full, unless the debt or interest payment is mandatory and due, or in the case of default and acceleration.
ii. The Eligible Lender must not cancel or reduce any existing committed lines of credit to the Eligible Borrower, except in an event of default.
iii. The Eligible Lender must certify that the methodology used for calculating the Eligible Borrower’s adjusted 2019 EBITDA for the leverage requirement is the methodology it has previously used for adjusting EBITDA when extending credit to the Eligible Borrower or similarly situated borrowers on or before April 24, 2020.
f. Required Borrower Certifications and Covenants: In addition to previous certifications required of Eligible Borrowers (no repayment of other debt, no cancelation of lines of credit), the term sheet added a certification that the Eligible Borrower has a reasonable basis to believe that, as of the date of origination of the Eligible Loan and after giving effect to such loan, it has the ability to meet its financial obligations for at least the next 90 days and does not expect to file for bankruptcy during that time period.
g. Fees. The Eligible Lender must now pay the SPV a "transaction fee" of 100 basis points on 100% of the principal amount of the Eligible Loan at the time of origination; previously, the Eligible Lender paid a "facility fee" of 100 basis points only on the SPV's 95% participation in the Eligible Loan. As before, the Eligible Lender may pass on this fee to the Eligible Borrower. The Eligible Lender may charge the Eligible Borrower an origination fee of up to 100 basis points of the amount of the Eligible Loan; previously the origination fee was fixed at 100 basis points. As before, the SPV will pay the Eligible Lender an annual servicing fee of 25 basis points of the 95% SPV participation in the Eligible Loan.
h. Other Provisions: Previous requirements related to compensation, stock repurchase, and capital distribution restrictions (with an exception for tax payments by pass-through entities) that apply to all direct loan programs, as well as the requirement to exercise "commercially reasonable efforts" to retain employees, remain the same for all the facilities. The Fed provided guidance in the FAQ linked below on the meaning of "commercially reasonable efforts". Borrowers that have already laid-off or furloughed employees as a result of the pandemic are still eligible to apply for Main Street loans.
2. Expanded Loan Facility: Many of the same requirements and limitations applicable to the New Loan Facility also apply to the Expanded Loan Facility, including those related to Eligible Lenders, Eligible Borrowers, Eligible Loan terms, Loan Participations, etc. Some differences are listed below:
a. An Eligible Loan under the Expanded Loan Facility can be a secured or unsecured term loan or revolving credit facility
(previously, only a term loan was allowed).
b. The existing loan must have been originated on or before April 24, 2020 (previously April 8), and must have a remaining maturity of at least 18 months (taking into account any adjustments made to the maturity of the loan after April 24, 2020, including at the time of upsizing).
c. Principal amortization is 15% at the end of the second year, 15% at the end of the third year, and a balloon payment of 70% at maturity at the end of the fourth year.
d. The minimum loan size has been increased to $10 million from $1 million previously, and the maximum loan size has been increased potentially to $200 million from the previous $150 million, although the actual maximum loan size will depend on the prior three-part formula for calculating the maximum.
e. The 30% of existing outstanding and committed but undrawn debt portion of the maximum loan formula has been increased to 35%. The 6x EBITDA (4x EBITDA under the New Loan Facility) portion of the maximum loan formula remains the same, except the Fed added the concept of "adjusted" EBITDA based on prior methodology used by the Eligible Lender to grant other loans to the Eligible Borrower.
f. As before, the SPV will purchase a 95% participation in the upsized tranche of the Eligible Loan so long as it was upsized on or after April 24, 2020. The Eligible Lender must be one of the lenders that holds an interest in the underlying Eligible Loan at the date of upsizing; must retain its 5% portion of the upsized tranche of the Eligible Loan until the upsized tranche of the Eligible Loan matures or the SPV sells all of its 95% participation, whichever comes first; and must also retain its interest in the underlying Eligible Loan until the underlying Eligible Loan matures, the upsized tranche of the Eligible Loan matures, or the SPV sells all of its 95% participation, whichever comes first. Any collateral securing the Eligible Loan (at the time of upsizing or on any subsequent date) must secure the upsized tranche on a pro rata basis.
g. The Eligible Lender must now pay the SPV a "transaction fee" of 75 basis points of the principal amount of the upsized tranche of the Eligible Loan at the time of upsizing; previously, the "facility fee" was 100 basis points. As before, the Eligible Lender may pass on this fee to the Eligible Borrower. The Eligible Lender may charge the Eligible Borrower an origination fee of up to 75 basis points (decreased from 100 basis points) of the upsized tranche of the Eligible Loan at the time of upsizing; previously the origination fee was fixed.
3. Priority Loan Facility: As with the Expanded Loan Facility, many of the same requirements and limitations applicable to the New Loan Facility also apply to the Priority Loan Facility, including those related to Eligible Lenders, Eligible Borrowers, etc. Some differences are listed below:
a. Principal amortization is the same as the Expanded Loan Facility, rather than the New Loan Facility, i.e., 15% at the end of the second year, 15% at the end of the third year, and a balloon payment of 70% at maturity at the end of the fourth year.
b. At the time of origination and at all times the Eligible Loan is outstanding, the Eligible Loan must be senior to or pari passu with, in terms of priority and security, the Eligible Borrower’s other loans or debt instruments, other than mortgage debt.
c. The SPV will only purchase at par value an 85% participation in the Eligible Loan, vs 95% for the loans under the other facilities.
d. Fees are the same as under the New Loan Facility.
e. The Eligible Borrower may at the time of origination of the Priority loan refinance existing debt owed by the Eligible Borrower to a lender that is not an Eligible Lender.
See the following links, including an extensive FAQ list, for more information on these facilities:
This client alert is one of a series as we track developments in the implementation of the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). For more information on the CARES Act, please see our prior client alerts: