On April 9, the Federal Reserve launched a $600 billion lending program to provide much needed liquidity to small and medium sized businesses to help them survive the economic turmoil caused by the COVID-19 pandemic. The Main Street Lending Program (MSLP) will offer 4-year loans to companies with up to 10,000 employees or with revenues less than $2.5 billion and that meet the eligibility requirements outlined below.
Key Details of the MSLP
- 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 5 percent of each loan.
- Banks will sell the remaining 95 percent to the Main Street Facility, which will purchase up to $600 billion of loans.
- Businesses must commit to make reasonable efforts to maintain payroll and retain workers.
- Businesses that are participating in the Paycheck Protection Program under the CARES Act may also participate in the Main Street Lending Program.
Borrower Eligibility Requirements
- Borrowers must be organized in the United States or under the laws of the United States, with a majority of employees located in the United States.
- Borrowers must have been in good financial standing before the COVID-19 crisis and must need financing resulting from exigent circumstances presented by the pandemic.
- Borrowers must have fewer than 10,000 employees or revenues of less than $2.5 billion.
Terms of Loans Made Under the MSLP
- 4-year maturity.
- Adjustable rates at the Federal Reserve’s Security Overnight Financing Rate (SOFR) plus or minus 250 to 400 basis points. As of the posting of this article the SOFR was .01 percent, so the interest rate would be 2.51 percent based on a 250-basis point adjustment.
- Payment and interest amortization is deferred for one year.
- Minimum loan size of $1 million.
- Main Street New Loan Facility (MSNLF) is for new loans originated on or after April 8, 2020. The maximum loan size is equal to the lesser of a) $25 million and b) an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed 4 times the borrower’s 2019 EBITDA.
- Main Street Expanded Loan Facility (MSELF) is for the expansion of existing loans originated prior to April 8, 2020. The maximum loans size is equal to the lesser of a) $150 million, b) 30 percent of the borrower’s existing outstanding and committed but undrawn bank debt and c) an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed 6 times the borrower’s 2019 EBITDA
- Companies cannot participate in both the MSNLF and the MSELF.
- No prepayment penalty.
- Fee of 100 basis points.
Required Borrower Attestations and Restrictions
There are a number of restrictions the MSLP will impose on borrowers, including restrictions on compensation, dividends, and stock buybacks. Companies should carefully evaluate each of these restrictions to determine whether the MSLP is a good fit for their situation.
- Borrowers must attest that they will use the loan proceeds to make reasonable efforts to maintain payroll and retain employees during the term.
- Proceeds may not be used to repay pre-existing loans or to reduce an existing line of credit.
- Borrowers may not repay debt of equal or lower priority, other than mandatory principal payments, until the loan under the Main Street Program has been repaid in full.
The following restrictions apply through the one-year anniversary of the repayment of the MSLP loan:
- Borrowers and their parent companies may not engage in stock buybacks.
- Borrowers may not pay dividends or make other distributions with respect to common stock.
- Borrowers may not pay compensation during any consecutive 12-month period which exceeds 2019 total compensation to any employee or officer whose total compensation in 2019 exceeded $425,000.
- Borrowers may not provide total compensation during any consecutive 12-month period which exceeds the sum of a) $3 million and b) 50 percent of 2019 total compensation in excess of $3 million to any employee or officer whose total compensation in 2019 exceeded $3 million.
The restriction on paying dividends and distributions will be of particular interest to most businesses. As it currently stands, the program does not appear to provide an exception to allow for the payment of passthrough income tax related distributions.
The Federal Reserve and the United States Department of the Treasury are seeking input from lenders, borrowers, and other stakeholders through April 16. We anticipate that additional details and guidance will be issued at the end of the comment period. HoganTaylor will continue to monitor developments in the Main Street Lending Program and will provide further updates and more information is made available.