On April 9, 2020, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) announced several programs intended to address the negative economic effect of business closures resulting from the COVID-19 pandemic. The Main Street Lending Program (MSLP) creates a special purpose vehicle (SVP) to purchase 95% participations in loans extended by U.S.-insured depository institutions, bank holding companies and savings and loan institutions (collectively, “Eligible Lenders”) to small and mid-sized businesses having no more than 10,000 employees or U.S. $2.5 billion in 2019 annual revenue. Eligible Lenders retain the credit risk of the remaining 5% on the MSLP Loan.

Who Is Eligible for MSLP Loans?

• U.S. businesses having less than 10,000 employees or U.S. $2.5 billion in 2019 revenue.
• Applicants must have significant operations and a majority of its employees in the United States.
• Borrowers may also participate in the SBA-guaranteed PPP Loan Program if eligible.
• Applicants must attest that the financing is necessary to facilitate employee retention and use reasonable efforts to maintain payroll and employees during the term of the MSLP Loan.
• Borrowers and their affiliates may not engage in any of the following during the period beginning when the MSLP Loan is made and ending 12 months after it has been repaid in full.
• Engage in stock buy-backs (except to the extent required by a contractual agreement in effect as of March 27, 2020).
• Pay dividends on common stock.
• Increase the compensation of any officer or employee whose total 2019 compensation exceeded $425,000.
• Provide severance pay or other benefits upon termination of employment exceeding 2x maximum total annual compensation.
• Increase the pay of officers or employees who were paid over $3 million in 2019 by more than 50% of the amount by which their 2019 compensation exceeded $3 million.
• Notably, the employer will need to agree not to "outsource or offshore jobs" for the term of the loan and for two years thereafter. If applicable, the employer will also agree not to abrogate existing collective bargaining agreements for the term of the loan and two years thereafter; however, the loan cannot be conditioned on entering into a collective bargaining agreement. Further, the employer must remain neutral in any union organizing effort for the term of the loan.

Restrictions

• MSLP Loans may not be used to refinance existing indebtedness.
• An MSLP Loan plus other indebtedness must not exceed 4x Borrower’s 2019 EBITDA (6x 2019 EBITDA for MSLP Loans made as additions to existing credit facilities).
• Borrowers cannot repay other debt prior to repaying MSLP Loan in full.
• An MSLP Loan is to be unsecured unless it represents an increase to existing secured indebtedness, in which case it can be secured on a pari passu basis.

Loan Parameters

• Minimum amount: $1 million.
• Maximum amount: lesser of $25 million and amount limited by Maximum Leverage Ratio (see second bullet under “Restrictions” above).
• Four-year repayment term with a one-year deferral of principal and interest payments.
• Adjustable Interest Rate of SOFR (secured overnight funding rate) plus 2.5% to 4.0%.
• No prepayment penalty.
• Borrower pays Eligible Lender an origination fee of 1%.
• SVP to pay Eligible Lenders an annual serving fee of 0.25% of the principal amount of the SVP’s participation.
• Unlike PPP Loans, MSLP Loans arenot eligible for forgiveness.

New Loans vs. Additional Loans

The MSLP is available for both new Term Loans (made on or after April 8, 2020) and increases in existing credit facilities. Notable differences include:

• 6x EBITDA Maximum Leverage Ratio for additions to existing credit facilities vs. 4x EBITDA Maximum Leverage Ratio for new Term Loans.
• Additions to existing credit facilities may be secured on a pari passu basis whereas new Term Loans are to be unsecured.
• Additions to existing credit facilities will likely be documented as amendments whereas new Term Loans will be separately documented, in either case following each Eligible Lender’s standards.

The MSLP Program is not final and additional clarification is expected. Notably we do not know:

• how long after origination the SPV will purchase its participations from Eligible Lenders;
• how EBITDA is defined for purposes of the MSLP and what add-backs or other adjustments will be allowed;
• the terms of the participation agreement between the SPV and the Eligible Lender, notably what consent rights vest in the SPV;
• whether and under what circumstances additions to existing credit facilities can be extended under agented credit facilities or club structures; and
• how differences in the two separate limits on office compensation will be resolved.

Duration of Program

• Applies to term loans originated on or after April 8, 2020.
• It is intended that the SPV will stop purchasing participations in MSLP Loans on September 30, 2020.

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