Special Edition Nutter Bank Report: Federal Reserve Creates New CARES Act Liquidity Facilities

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On April 9, 2020, the Federal Reserve established new liquidity facilities to support lending programs authorized under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The Federal Reserve’s press release announcing the new facilities is available here.

The new facilities are created under the authority of Section 13(3) of the Federal Reserve Act, with the required approval of the Treasury Secretary. They support the (i) Paycheck Protection Program (PPP), (ii) Main Street Lending Program, and (iii) Municipal Liquidity Facility.

  • (i) The Paycheck Protection Program Liquidity Facility will extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value in order to increase the effectiveness of the PPP by supplying liquidity to participating financial institutions through term financing backed by PPP loans to small businesses. The PPP provides loans to small businesses in order to keep their workers on the payroll. The Paycheck Protection Program Liquidity Facility Term Sheet is available here.
  • (ii) The Main Street Lending Program, authorized under Section 4003(c)(3)(D) of the CARES Act, will provide $75 billion in equity to the facility to ensure credit flows to small and mid-sized businesses with the purchase of up to $600 billion in loans using funding from the Department of the Treasury. The Main Street New Loan Facility Term Sheet is available here and the Main Street Expanded Loan Facility Term Sheet is available here.
  • (iii) The Municipal Liquidity Facility, authorized under Section 4003(c)(3)(E) of the CARES Act, will help state and local governments manage cash flow stresses by offering up to $500 billion in lending to states and municipalities. The Treasury will provide $35 billion of credit protection to the Federal Reserve using funds appropriated under the CARES Act. The Municipal Liquidity Facility Term Sheet is available here.

Paycheck Protection Program Liquidity Facility Key Terms:

  • Eligible financial institutions that originate PPP loans may pledge the loans as collateral at face value for nonrecourse term financing with their respective Federal Reserve Bank.
  • Financing rate of 35 basis points.

Main Street Lending Program Key Terms:

  • The Main Street Lending Program and its two liquidity facilities will enhance support for small and mid-sized businesses that were in good financial standing before the crisis by offering four-year loans to companies employing up to 10,000 workers or with revenues of less than $2.5 billion.
  • Principal and interest payments will be deferred for one year.
  • Eligible banks may originate new Main Street loans or use Main Street loans to increase the size of existing loans to businesses.
  • Banks will retain a five percent share, selling the remaining 95 percent to the Main Street facility, which will purchase up to $600 billion of loans.
  • Firms seeking Main Street loans must commit to make reasonable efforts to maintain payroll and retain workers.
  • Borrowers must also follow compensation, stock repurchase, and dividend restrictions that apply to direct loan programs under the CARES Act.
  • Lenders, borrowers, and other stakeholders may provide input on the Main Street Lending Program on the Federal Reserve’s feedback form until April 16. 

Main Street New Loan Facility Terms

  • The Main Street New Loan Facility will lend on a recourse basis to a SPV which will purchase loans from “Eligible Lenders”.
  • “Eligible Lenders” are U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies.
  • “Eligible Borrowers” are 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.
  • Eligible Borrowers that participate in the Facility may not also participate in the Main Street Expanded Loan Facility or the Primary Market Corporate Credit Facility.
  • An “Eligible Loan” is a term loan made by an Eligible Lender(s) to an Eligible Borrower that was originated before April 8, 2020, provided that the upsized tranche of the loan has the following features:
  1. Four-year maturity;
  2. Amortization of principal and interest deferred for one year;
  3. Adjustable rate of SOFR + 250-400 basis points;
  4. Minimum loan size of $1 million;
  5. Maximum loan size that is the lesser of (i) $150 million, (ii) 30% 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 bank debt, does not exceed six times the Eligible Borrower’s 2019 earnings before interest, taxes, depreciation, and amortization (EBITDA); and
  6. Prepayment permitted without penalty.

Main Street Expanded Loan Facility Terms

  • The Main Street Expanded Loan Facility will lend on a recourse basis to a SPV which will purchase loans from Eligible Lenders.
  • “Eligible Lenders” are U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies.
  • “Eligible Borrowers” are 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. Eligible Borrowers that participate in the Facility may not also participate in the Main Street New Loan Facility or the Primary Market Corporate Credit Facility.
  • Eligible Loan is a term loan made by an Eligible Lender(s) to an Eligible Borrower that was originated before April 8, 2020, provided that the upsized tranche of the loan has the following features:
  1. Four-year maturity;
  2. Amortization of principal and interest deferred for one year;
  3. Adjustable rate of SOFR + 250-400 basis points;
  4. Minimum loan size of $1 million;
  5. Maximum loan size that is the lesser of (i) $150 million, (ii) 30% 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 earnings before interest, taxes, depreciation, and amortization (“EBITDA”); and
  6. Prepayment permitted without penalty.

Municipal Liquidity Facility Key Terms:

  • The Municipal Liquidity Facility will lend on a recourse basis to a SPV which will purchase up to $500 billion of short-term Eligible Notes from Eligible Issuers.
  • “Eligible Notes” are tax anticipation notes (TANs), tax and revenue anticipation notes (TRANs), bond anticipation notes (BANs), and other similar short-term notes issued by Eligible Issuers, provided that such notes mature no later than 24 months from the date of issuance.
  • “Eligible Issuers” must pay an origination fee equal to 10 basis points of the principal amount of the Eligible Issuer’s notes purchased by the SPV. The origination fee may be paid from the proceeds of the issuance.
  • Eligible Notes will be directly purchased from U.S. states (including the District of Columbia), U.S. counties with a population of at least two million residents, and U.S. cities with a population of at least one million residents.
  • Eligible state-level issuers may use the proceeds to support additional counties and cities.
  • Eligible Notes will not be purchased after September 30, 2020, unless extended by the Federal Reserve and the Treasury Department.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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