Federal Reserve Board Issues New Guidance on Main Street Lending Program
On April 30, the Federal Reserve Board (“Federal Reserve”) announced that it is expanding the eligibility requirements for the Main Street Lending Program (“Program”) so that more businesses will have access to participate in the Program. The Federal Reserve also expanded the scope and terms of the Program so that they are more attractive and accessible to small and mid-sized businesses.
As background, the Program was authorized under Title IV of the CARES Act. It was established for the purpose of making loans available to small and mid-sized businesses which were in sound financial condition prior to the COVID-19 pandemic but which have become financially strained due to the pandemic.
Under the Program, businesses will apply for and receive loans directly from eligible banks and/or credit unions. The federal government makes the capital for these loans available to lenders through a $75 billion equity investment by the Treasury in a special purpose vehicle (“SPV”), which in turn will purchase either 85% or 95% participation (depending on the Program loan option) in Program loans.
The Program initially provided for only two loan options, and limited eligibility for these loans to businesses with up to 10,000 employees or $2.5 billion in annual revenues in 2019. At the time the Federal Reserve initially announced the Program terms, it also announced that it would accept feedback on the Program through April 16, 2020. After receiving significant feedback on the published terms of these loans, including the minimum eligibility requirements and the minimum and maximum loan amounts available under the Program, the Federal Reserve on April 30th published revised term sheets for the Program and announced the expansion of the scope and eligibility of Program loans.
Under the newly expanded Program, there are three separate credit facilities available, i.e., the Main Street New Loan Facility (“MSNLF”), the Main Street Priority Loan Facility (“MSPLF”), and the Main Street Expanded Loan Facility (“MSELF”).
Each of these credit facilities is in place to service different types of loans. The MSNLF services new loans made to eligible borrowers, the MSPLF provides loans that can be used to refinance a borrower’s existing debt with entities other than the lender, and the MSELF services increased funding/extensions of credit to existing borrowers. Under all loan options, lenders can apply their own underwriting standards to measure a borrower’s income and ability to repay the loan.
In order to be eligible for the loan, a business must:
- Have been established prior to March 13, 2020;
- Have either 15,000 or fewer employees or up to $5 billion in 2019 annual revenues;
- Have been created or organized in the U.S. with significant operations in and a majority of its employees based in the U.S.; and
- Not have received specific support under Subtitle A of Title IV of the CARES Act. To clarify, this does not include receipt of a Paycheck Protection Program (“PPP”) loan. Businesses which have received a PPP loan are still eligible to receive a Program loan.
Each loan option under the Program (MSNLF, MSPLF, and MSELF) will have the following terms:
- Four (4) year repayment term;
- Deferral of principal and interest payments for one year;
- Adjustable interest rate of LIBOR plus 3 percent;
- No prepayment penalty; and
- Program loans cannot be subordinated to other loans or debt instrument, and the loans may be secured or unsecured.
Both MSNLF and MSPLF will require minimum loan amounts of $500,000. MSELF will require a minimum loan amount of $10 million. Maximum loan amounts vary for each loan option, with loans under the MSNLF and MSPLF having the ability to be in an amount up to $25 million and loans under the MSELF having the ability to be up to $200 million. Each of these maximum loan amounts may be reduced depending on the borrower’s 2019 earnings before interest, taxes, depreciation, and amortization and other factors.
A borrower applying for a Program loan must make various certifications and covenants, including that:
- It will make commercially reasonable efforts to maintain its payroll and retain its employees during the period that the Program loan is outstanding;
- No payments other than required principal and interest payments will be made on any other debt until the Program loan is repaid in full;
- The borrower has a reasonable basis to believe that, as of the date of origination of the loan, it has the ability to meet its financial obligations for at least the next 90 days;
- During the term of the loan and for one year after the loan is no longer outstanding:
- The borrower will not enter into any stock buyback or pay any dividends unless it is already contractually obligated to do so;
- The borrower will not increase the compensation of employees whose compensation exceeded $425,000 in 2019; and ‘
- With respect to employees whose total compensation exceeded $3 million in 2019, the borrower will limit the compensation paid to such employees to $3 million plus 50 percent of the amount he or she made over $3 million in 2019.
The Main Street Lending Program has not officially been launched, but we expect that it will in the next few weeks. Additional information on the Main Street Lending Program and term sheets for each loan option is available on the Federal Reserve’s website: https://www.federalreserve.gov/monetarypolicy/mainstreetlending.htm
If you have questions on the Main Street Lending Program, please reach out to the attorneys at Atkinson, Andelson, Loya, Ruud & Romo.
. This means that businesses can still be eligible for loans under the Program even if they have more than 15,000 employees, as long as do not exceed the annual revenue threshold.
This AALRR publication is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR publication does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing process.
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