The Federal Reserve’s (Fed) $600 billion Main Street Lending Program recently launched the latest of several market interventions aimed at cushioning some of the economic damage wrought by the coronavirus. The program aims to provide loans to businesses that were doing well prior to the pandemic but are now struggling to fund operations and retain employees. Under the program, participating banks make loans to struggling businesses and the Fed buys 95% of those loans from the banks.
Businesses established before March 13, 2020, with up to 15,000 employees or up to $5 billion in 2019 revenue are eligible for the program. There are several caveats to this rule: several kinds of businesses—private clubs, financial institutions, casinos, and certain other types of businesses—do not qualify, neither do businesses that have received support from one of the other Main Street loan facilities. Notably, receiving a loan under either the Paycheck Protection Program or the Economic Injury Disaster Loan program does not disqualify a borrower. Nonprofit organizations do not currently qualify either, but a recent Fed proposal to modify the program signals that some 501(c)(3) and 501(c)(19) organizations may have access in the near future.
Three loan options
The program provides three loan options—the first two concerning new loans, the third concerning the upsizing of existing loans. The terms of each option are largely the same: The term for each loan is five years, the principal repayment schedule begins after two years, and interest payments are deferred for one year. Unlike Paycheck Protection Program loans, none of the Main Street Lending Program loans are forgivable. Similar though they might be, each loan option is slightly different, with different maximum and minimum loan sizes, and different transaction fees and requirements.
A loan under the first option, the New Loan Facility, must be at least $250,000 and cannot exceed $35 million. The loan can only be extended if it does not push the borrower’s debt above four times its EBITDA (income adjusted for interest payments, taxes, depreciation, and amortization). The lender must pay the Fed a transaction fee equivalent to 100 bps of the principal, which may be passed onto the borrower, and the borrower must also pay the lender a loan origination fee of up to 100 bps of the principal.
A loan under the second option, the Priority Loan Facility, is quite similar. It must be for at least $250,000 and cannot exceed $50 million. The loan can only be extended if it does not push the borrower’s debt above six times its EBITDA and the loan’s fees are equivalent to those that apply to the New Loan Facility.
The third option, the Expanded Loan Facility, is slightly different. A business with a loan already in place on April 24, 2020, with a remaining maturity of at least 18 months can upsize that loan if, as of December 31, 2019, the loan had an internal risk rating equivalent to a “pass” in the FFIEC’s rating system. The loan must be increased by at least $10 million and cannot be increased by more than $300 million. The loan can only be extended if, when added to existing debt, it does not push the borrower’s debt above six times its EBITDA. The loan origination and transaction fees are lower for the Expanded Loan, each equivalent to 75 bps.
If you secure a Main Street Lending Program loan
Should a business secure a loan under the Main Street Lending Program, it will agree to abide by several covenants. The business will agree to make “commercially reasonable efforts” to maintain its payroll and retain its employees while the loan is outstanding (businesses that have already laid off or furloughed employees, however, remain eligible for the program). It will agree not to repay the principal of, or pay interest on, other outstanding debt until the Main Street loan is repaid, unless the payment is mandatory and due. It will certify that, as of the origination date, it believes the business has the ability to meet its financial obligations for at least the next 90 days, and it will certify that it will comply with the CARES Act restrictions on compensation and stock buybacks and capital redistribution.
The Main Street Lending Program may serve as an important source of capital for businesses challenged by the COVID-19 pandemic. Lenders and borrowers can consult the latest guidance available here.
A special thank you to our summer clerk, Lucas Sczygelski, for his assistance is writing this post.