Federal Reserve Announces Updated Information and FAQs on Main Street Lending Program

Significant among the updated terms are changes made to expand the criteria for businesses eligible for loans, changes to the interest rate, reduction of the minimum loan size and the establishment of a third lending facility, the Main Street Priority Loan Facility (MSPLF), which is intended for higher leveraged borrowers.

Background

On April 9, the fed provided initial details on the Main Street Lending Program, which will utilize $75 billion from the Treasury Department’s appropriations under the CARES Act for a lending facility that will purchase up to $600 billion of newly issued and existing loans from eligible lenders that provide debt financing to small and mid-size businesses. The loans will be directly administered through private banking institutions who will sell majority participations in the loans to a special purpose vehicle created by the Fed, with lenders retaining a small portion of the loans. As originally conceived, this was to be accomplished through two lending facilities: (i) the Main Street New Loan Facility (MSNLF), intended for the extension of new credit to borrowers, up to the lesser of (A) $25 million or (B) an amount that, when added to existing and undrawn available debt, does not exceed 4.0x adjusted 2019 EBITDA of the borrower; and (ii) the Main Street Expanded Loan Facility (MSELF), intended for the extension of additional credit under existing term loans and revolving facilities between eligible lenders and borrowers, up to the lesser of (A) $200 million, (B) 35% of existing outstanding and undrawn available debt, or (C) an amount that, when added to outstanding and undrawn available debt, does not exceed 6.0x adjusted 2019 EBITDA of the borrower.

The loans authorized under the program are low-interest, non-forgivable loans with 4-year repayment terms, and payments are deferred during the first year of the loan. To be eligible for these loans, borrowers are required to make certain certifications that they will follow compensation and equity repurchase and distribution restrictions referenced in the CARES Act. Borrowers who also received a loan under the Paycheck Protection Program may also qualify to receive a loan under the Main Street Lending Program. Our earlier client alert regarding the initial details of the Main Street Lending Program is available here.

Changes to Loan Terms and Eligibility

The fed’s April 30 announcement made notable changes to the terms of the loans to be available under the Main Street Lending Program announced on April 9.  Firstly, the fed has expanded the range of eligible borrowers to now include businesses with up to 15,000 employees or up to $5 billion in 2019 annual revenue, up from the previous limits of 10,000 employees or $2.5 billion in annual revenue.  The employee calculation includes all full-time, part-time, seasonal or otherwise employed persons (excluding volunteers and independent contractors) of the borrower and its affiliates. The revenue calculation requires borrowers to aggregate their revenues with that of their affiliates, and revenues may either be calculated based on 2019 revenues reported in audited financial statements prepared in accordance with GAAP or annual receipts reported to the IRS for the fiscal year 2019.

Further, regarding eligibility, the program’s FAQs clarify that eligible businesses must be legally formed entities organized for profit and must be U.S. businesses. Also, despite earlier indications in the CARES Act that a program such as this would be made available to nonprofit entities, the FAQs state that nonprofit entities are not currently eligible for the program. However, the FAQs indicate that the fed will be evaluating the feasibility of adjusting eligibility criteria and metrics to enable nonprofit entities to eventually participate.

In addition to the changes made to eligibility requirements, the fed has also reduced the minimum loan size from $1 million to $500,000 for new loans issued under the MSNLF and the MSPLF. The minimum for expanded loans under the MSELF has been set at $10 million. Also, the fed changed the interest rate for these loans from the Secured Overnight Financing Rate + 250-400 basis points to LIBOR + 300 basis points.

Notably, the fed added to or modified several of the covenants and certifications required for borrowers to obtain a loan under the program:

• • Under the MSNLF and MSELF, borrowers must commit to refrain from repaying the principal balance of, or interest due on, any debt until the Program’s loan is repaid in full (unless any such payments are mandatory and due). Borrowers must also commit to not seek to cancel or reduce any of their committed lines of credit with any lender.
  • The bankruptcy certification was modified to require borrowers to certify that as of the loan origination date, the borrower has the ability to meet its financial obligations for at least 90 days and does not expect to file for bankruptcy during that period.
  • In lieu of earlier pronouncements requiring borrowers to use loan proceeds to retain or restore at least 90% of their workforce, borrowers are now only required to make commercially reasonable efforts to maintain their payroll and retain their employees during the time the loan is outstanding.
  • Borrowers are no longer required to attest that the uncertainty of economic conditions necessitate the loan application to support a borrower’s ongoing operations.

Lastly, the fed clarified that lenders may charge borrowers origination fees up to 100 basis points of the principal amount of the loan at origination. To encourage competition among participating lenders, this a modification to the fed’s original pronouncement requiring the payment by borrowers of a flat origination fee of 100 basis points.

The New MSPLF

Similar to the MSNLF, the MSPLF provides new credit to borrowers. However, as noted above, the newly announced MSPLF is intended for more highly leveraged borrowers, where the maximum loan size is the lesser of (i) $25 million or (ii) an amount that, when added to existing and undrawn available debt, does not exceed 6.0x adjusted 2019 EBITDA for the borrower (up from 4.0x adjusted 2019 EBITDA under the MSNLF). To offset the added risk associated with these loans, the fed requires participating lenders to bear a higher risk retention of 15% of these loans in comparison to loans under the other program facilities (which require only 5% participation).

To enable borrowers under this facility to seek credit relief, the MSPLF modifies the debt repayment covenant summarized above under the MSNLF and MSELF facilities to enable a borrower, at the time of origination, to refinance existing debt owed by the borrower to a lender that is not eligible to participate in the Program.

Timing and Additional Information

Subject to the fed’s and the Treasury Department’s right to extend the program, the fed’s SPV will only be purchasing participations in program loans through September 30, 2020, likely resulting in the end of the ability of potential borrowers to access this financing. However, the Fed has yet to announce the start date for the program, which it indicates it expects to do soon.

We will continue to monitor new information as it is released and will provide further guidance to you as it becomes available, including the anticipated start date for the program.

The Coronavirus Task Force at Klehr Harrison stands ready to assist you in your business and legal needs. We will continue to provide additional information and guidance as the COVID-19 situation develops.

Author Justin Csik is an associate in the Corporate & Securities Department at Klehr Harrison.