The window for the Main Street Loan Program (“Main Street Program”), designed to provide loans with favorable terms to midsize companies to help address the economic fallout caused by the pandemic, is closing on December 31, 2020. With a capacity of up to $600 billion for providing loans, the Main Street Program to date has originated loans totaling about $4 billion to fewer than 500 borrowers. Loans for the Main Street Program are originated by a qualified banking institution (“Eligible Lender”), which then sells 95% participations in such loans at the full principal amount to a special-purpose vehicle created by the Federal Reserve Bank of Boston (“SPV”). The SPV is scheduled to cease purchasing participations on December 31, 2020, absent action by the Treasury Department and the Federal Reserve System. This alert summarizes the key features of the Main Street Program to provide midsize businesses one last opportunity to evaluate whether to pursue a loan from the Main Street Program.
Any entity organized in the United States prior to March 13, 2020 (the date on which a federal emergency was declared), which conducts active business operations and which either (a) has no more than 15,000 employees or (b) has annual revenues for 2019 of not more than $5 billion will qualify as an Eligible Borrower. The business must have significant operations, and a majority of its employees based, in the United States; the business must not be passive (such as lending, investing, life insurance) or involve illegal business operations. For purposes of determining the number of employees and annual revenues, as with the Small Business Administration’s Paycheck Protection Program, the relevant business must include all other business entities under common control, which may make it difficult for portfolio companies of private equity, venture capital and hedge pooled investment funds to qualify for a loan. See our prior alerts here and here. Eligible Borrowers who received an SBA Paycheck Protection Program loan can still qualify for a Main Street Program loan. An affiliated group of companies may receive only one Main Street Program loan.
A proposed borrower must have been in sound financial condition before the onset of the pandemic. The Eligible Lender must assess the financial condition of the proposed borrower at the time of the loan application, and any outstanding loans with the Eligible Lender as of December 31, 2019, must have been assigned an internal risk rating equivalent to “pass” under the applicable supervisory rating system in effect on such date.
To qualify as an Eligible Borrower, the entity will be required to certify that (a) it has significant operations in the United States (greater than 50% of its assets, annual net income, annual net operating revenues or annual operating expenses), (b) a majority of its employees are based in the United States, (c) no federal government official or the official’s family members owns directly or indirectly 20% or more of the entity, (d) it is unable to secure adequate credit accommodations from other banking institutions, and (e) it has a reasonable basis to believe that, as of the origination of the Main Street Program 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 such 90-day period.
Key Financial Terms of a Main Street Program Loan
A Main Street Program loan must have:
The Main Street Program contains three types of loans:
The principal difference between the facilities concerns the loan amount and the priority of the loan facility relative to other debt of the Eligible Borrower. The maximum loan amount of any loan in the Main Street Program will be a multiple of adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) for 2019. EBITDA for 2019 may be adjusted using the methodology that the Eligible Lender previously required when extending credit to the Eligible Borrower, or if the Eligible Borrower is a new customer of the Eligible Lender, the adjustments permitted to similarly situated borrowers on or before April 24, 2020.
The Main Street Program loan amounts are as follows:
The relative priority of the Main Street Program loan facilities is as follows:
The fees for a Main Street Program loan are as follows:
Use of Proceeds of a Main Street Program Loan
The Main Street Program was designed to provide liquidity to small and midsize businesses that were in sound financial condition prior to the onset of the pandemic. As such, an Eligible Borrower may use the proceeds of a Main Street Program loan to fund its ongoing domestic operations but may not use the proceeds to fund (a) the operations of foreign affiliates, (b) dividend payments or other distributions to its owners, (c) compensation over specified thresholds or (d) the repayment or prepayment of other debt, except in specified situations.
Eligible Borrower Restrictions on Ongoing Business Operations
For a period from the origination of a Main Street Program loan until 12 months after the Main Street Program loan is fully repaid, an Eligible Borrower must agree to (a) restrict the total compensation it pays to any employee or officer in excess of $3 million over any 12-month period; (b) not repurchase any of its or its parent’s publicly traded equity securities, other than repurchases required under a contractual obligation in effect as of March 27, 2020; (c) not pay any dividends or other capital distributions on its ownership equity, other than certain tax distributions and preferred or mandatory preferential dividends or distributions if the obligation to make such payments existed as of March 27, 2020; and (d) not seek to cancel or reduce any of its committed lines of credit.
In addition, an Eligible Borrower must agree not to repay any principal amount of, or pay any interest on, any debt, unless such payment is mandatory and due in accordance with its terms, until the Main Street Program loan is repaid in full or the government no longer holds its participation interest in the loan. A safe harbor is provided for (a) refinancing debt that is maturing no later than 90 days from the date of such refinancing, (b) repaying a line of credit in accordance with the Eligible Borrower’s normal course of business usage for such line of credit, and (c) taking on additional debt obligations required in the normal course of business on standard terms and other than a security interest in respect of the assets funded thereby, in which case any security must be of equal or lower priority (in respect of a Main Street Program Priority or Expanded loan). An Eligible Borrower is also expected to use commercially reasonable efforts to maintain its payroll and retain its employees during the time the Main Street Program loan is outstanding.
To evaluate whether the Main Street Program may work for their liquidity needs, businesses are urged to consult their professional advisers.