On April 9, 2020, the U.S. Federal Reserve announced the creation of the Main Street New Loan Facility (Facility), to facilitate lending to small and medium-sized businesses by eligible lenders. A copy of the announcement is available here.

Under the Facility and the Main Street Expanded Loan Facility (MSELF), a Federal Reserve Bank (Reserve Bank) will commit to lend to a single common special purpose vehicle (SPV) on a recourse basis.

The U.S. Department of Treasury will make a $75 billion equity investment in the SPV in connection with the Facility and the MSELF. The combined size of the Facility and the MSELF will be up to $600 billion.

Below is an FAQ we’ve prepared highlighting key aspects of the announcement.

What Lenders are Eligible to Participate in the Facility?

U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies will be eligible to participate.

What Borrowers are Eligible to Participate in the Facility?

Eligible borrowers are:

• Businesses with up to 10,000 employees; or
• Businesses with up to $2.5 billion in 2019 annual revenues.

To be eligible a business 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. Given the loan size requirements listed below, the business must have been in existence in 2019.

Eligible borrowers that participate in the Facility are prohibited from also participating in the MSELF or the Primary Market Corporate Credit Facility.

NOTE: Initial guidance had indicated that loans under the Facility will be available to businesses with more than 500 employees and fewer than 10,000 employees, but the new guidance states that the Facility is available for small businesses(i.e. businesses with fewer than 500 employees.) Based on the new guidance eligible borrowers may participate in both the Facility and the Paycheck Protection Program.

What Loans are Eligible to be Made Under the Facility?

An eligible loan is an unsecured term loan made by an eligible lender to an eligible borrower that was originated on or after April 8, 2020, provided that the loan has the following features:

• four-year maturity;
• amortization of principal and interest deferred for one year;
• adjustable rate of Secured Overnight Financing Rate (SOFR) + 250-400 basis points – NOTE: The current SOFR is 0.01% (1 basis point);
• minimum loan size of $1 million;
• maximum loan size that 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 eligible borrower’s 2019 earnings before interest, taxes, depreciation, and amortization (EBITDA); and
• prepayment permitted without penalty.

Are there any Specific Attestations Required to be Made by Lenders or Borrowers?

In addition to certifications required by applicable statutes and regulations, eligible borrowers and/or eligible lenders will be required to make the following attestations with respect to each eligible loan:

• The eligible lender must attest that the proceeds of the eligible loan will not be used to re-pay or refinance pre-existing loans or lines of credit made by the eligible lender to the eligible borrower.
• The 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 coronavirus disease 2019 (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 – NOTE: Previous guidance indicated that the eligible borrower would be required to maintain at least 90% of its employees; this guidance does not give an exact number.
• The eligible borrower must attest that it meets the EBITDA leverage condition stated above specifying required features of eligible loans.
• 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 – i.e. (a) for a period of 12 months from the date the eligible loan is no longer outstanding the eligible borrower, (i) will not to buy back any equity securities of the eligible borrower or any parent company that are listed on any national securities exchange (other than to the extent required under a contractual obligation in effect prior to the enactment of the CARES Act) or (ii) will not pay any dividend or make other capital distribution, and (b) comply with certain limitations regarding employee compensation set forth by the CARES Act in Section 4004 (essentially, total compensation to officers or employees exceeding $425,000 in 2019 is frozen and total compensation to officers or employees exceeding $3 million is limited to the sum of (i) $3 million and (ii) 50% of the excess over $3 million received by the officer or employee in 2019). These requirements may be waived by the Secretary of the Treasury only if such waiver is deemed necessary to protect the interests of the Federal Government.
• Eligible lenders and eligible borrowers will each be required to certify that the entity is eligible to participate in the Facility.

Are There Any Fees Associated with the Facility?

An eligible lender will pay the SPV a facility fee of 100 basis points (1%) of the principal amount of the loan participation purchased by the SPV. The eligible lender may require the eligible borrower to pay this fee.

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.

When Will the Facility End?

The SPV will cease purchasing participations in eligible loans on September 30, 2020, unless the Federal Reserve System and the U.S. Department of Treasury extend the Facility. The Reserve Bank will continue to fund the SPV after such date until the SPV’s underlying assets mature or are sold.

Is This Guidance Final?

No, the Board of Governors of the Federal Reserve System and Secretary of the Treasury will likely make adjustments to the terms and conditions described above and have asked for comments through April 16.

What Should Interested Borrowers Do?

Those interested in the Facility should:

• contact their banks to confirm whether they will be participating in the Facility and request further information when it becomes available;
• work with their counsel to review their existing debt and organizational documents to determine whether there are any covenants that would restrict them from participating in the Facility that need to be addressed; and
• review their records to assess maximum loan eligibility by determining available but undrawn credit lines and EBITDA level for application purposes.