Help Is on the Way for Mid-Sized Businesses as Fed Launches Main Street Business Lending Program
Now that the Payroll Protection Program (PPP) and Economic Injury Disaster Loan (EIDL) program are assisting small businesses, the U.S. Treasury Department and Federal Reserve (Fed) are turning their attention to mid-sized businesses by launching the Main Street Business Lending Program (MSBLP). According to Treasury Secretary Steven Mnuchin, the purpose of the program is to "make a significant difference for the 40,000 medium-sized businesses that employ 35 million Americans."
The Coronavirus Aid, Relief, and Economic Security (CARES) Act granted the Fed Board of Governors authority to establish the MSBLP. As part of that process, on April 9, 2020, the Fed announced a new $2.3 trillion stimulus package that includes up to $600 billion to support mid-sized businesses. The MSBLP includes two new lending facilities focused primarily on mid-sized businesses: i) the Main Street New Loan Facility (MSNLF), which supports new loans after April 8, 2020 in an amount up to $25 million, and ii) the Main Street Expanded Loan Facility (MSELF), which supports increased funding for loans that were outstanding before April 8, 2020. Unlike PPP loans, MSNLF and MSELF loans are not forgivable and numerous restrictions are imposed on the borrower's operations while the loan is outstanding and for one year after the loan is paid back.
As with the PPP when it was first announced, little information is available about the details of the MSNLF and MSELF. For example, no guidance has been provided on many of the issues that caused uncertainty with respect to the PPP, such as whether "affiliation rules" will be considered in determining eligibility and how to count a borrower's employees. The Fed has indicated that it will take comments on the MSBLP's terms and conditions until April 16, 2020. Accordingly, we expect additional regulations and guidance shortly.
Here is the latest information provided by the Fed for mid-sized businesses regarding the MSNLF and MSELF. This information is subject to change as additional regulations and guidance are developed. Once that information is released, businesses will be better able to assess whether the restrictions imposed by the facilities make it worthwhile to apply for a loan.
Main Street New Loan Facility
The purpose of the MSNLF is to provide new loans to mid-sized businesses. The Fed Term Sheet outlining the MSNLF is available here.
Eligibility: Loans under the MSNLF are geared toward businesses (including nonprofits) with up to 10,000 employees or up to $2.5 billion in revenues for 2019. Note:
- A borrower must be a business that is 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.
- A borrower that participates in the MSNLF may not also participate in the MSELF or the Primary Market Corporate Credit Facility, which is another facility under the MSBLP.
Loan Amounts: Loans will be for a minimum of $1 million and up to either $25 million or an amount that when added to the borrower's existing outstanding and committed but undrawn debt, does not exceed four times the borrower's 2019 earnings before interest, taxes, depreciation, and amortization (EBITDA).
Where to Get a Loan: Borrowers will obtain loans directly through eligible lenders and not through the government. Eligible lenders include U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies. A special purpose vehicle (SPV) created by the Main Street program will purchase a 95 percent participation in each loan at par value, and the lender will retain 5 percent of the loan.
Underwriting: The Fed has indicated that lenders will be expected to use customary underwriting standards to ensure that loans are prudently approved and are not provided to a debtor in a bankruptcy proceeding.
Term of the Loan: Four years.
Interest Rate: Adjustable rate equal to the Fed's Secure Overnight Financing Rate (currently 0.01 percent), plus 250-400 basis points.
Deferral: Amortization of principal and interest deferred for one year.
Right to Prepay: There will be no prepayment penalty.
Collateral: The loans will be unsecured.
Fees: A borrower will pay an origination fee equal to 100 basis points of the principal amount of the loan. The borrower may be required to pay other fees including a facility fee equal to 100 basis points of the principal amount of the loan participation purchased by the SPV.
Additional Requirements: A borrower must make the following attestations:
- It will not use the loan proceeds to repay or refinance pre-existing loans or lines of credit made by the lender to the borrower.
- It will not use the loan proceeds to repay other debt of equal or lower priority, with the exception of mandatory principal payments.
- It will not seek to cancel or reduce any of its outstanding lines of credit with any lender.
- It requires financing due to the exigent circumstances presented by the COVID-19 pandemic, and it will make reasonable efforts to maintain its payroll and retain its employees during the term of the loan.
- It meets the EBITDA leverage conditions.
- It is eligible to participate in the facility, including in light of the conflicts of interest prohibition in section 4019(b) of the CARES Act.
- 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, including:
- The borrower (whose securities are publicly traded) must refrain from stock buybacks for one year after the loan is no longer outstanding (except to the extent required by any contractual obligations in effect as of March 27, 2020).
- The borrower (whether or not public) will not pay dividends or other capital distributions for one year after the loan is no longer outstanding.
- The borrower will comply with the following limits on employee compensation from the date of the loan until one year after the loan is no longer outstanding:
- Officers and employees (other than an employee paid under a collective bargaining agreement) earning total compensation of more than $425,000 in 2019 may not receive a raise or severance benefits in excess of 2019 compensation levels (compensation includes salary, bonuses, award of stock, and other financial benefits provided by the borrower).
- Officers and employees earning more than $3 million in 2019 may not earn more than $3 million plus half the amount of their compensation in excess of $3 million.
- Any officer or employee receiving total compensation of more than $425,000 (other than an employee paid under a collective bargaining agreement) may not receive severance pay or other benefits upon termination in excess of two times the officer or employee's total compensation in calendar year 2019.
Notably, the CARES Act has certain requirements that were not included in the Fed's Term Sheet or differ from the Term Sheet. These include:
- The funds received must be used to retain at least 90 percent of the recipient's workforce at full compensation and benefits until September 30, 2020. (The Term Sheet states the borrower "will use the loan proceeds to 'make reasonable efforts' to maintain payroll and retain employees during the loan term.")
- The recipient will not outsource or offshore jobs until two years after the loan is repaid.
- The recipient will not abrogate any collective bargaining agreements during the term of the loan and for a period of two years thereafter and will remain neutral in any union organizing effort during the term of the loan.
- Eligible businesses must have at least 500 employees. (The Term Sheet says eligible borrowers are "business with up to 10,000 employees," implying that smaller businesses may also qualify.)
It is unclear whether these provisions will be included in the MSNLF and further guidance will be necessary.
Main Street Expanded Loan Facility
The MSELF provides funding to a borrower to "upsize" the amount of a borrower's loan originated before April 8, 2020. The Term Sheet for the MSELF is available here.
Terms: The terms are the same as those for the MSNLF, except that the maximum loan increase is the lesser of i) $150 million, ii) 30 percent of the borrower's existing outstanding and committed but undrawn bank debt, or iii) an amount that when added to the borrower's existing outstanding and committed but undrawn debt does not exceed six times the borrower's 2019 EBITDA.
These loans, consisting of the portion of the upsized tranche, may be secured by collateral pledged under the original loan terms or at the time of upsizing, provided the new loan is secured pro rata with the existing loan.
Can a Borrower Apply for Both a Main Street Loan and a PPP Loan?
It appears that a borrower can take advantage of the Main Street programs and the PPP so long as it qualifies for both, but borrowers may not participate in both the MSNLF and the MSELF.
For more information about these and other government loan programs, please contact your Much attorney.
We are providing various loan applications and links to related information as a convenience. The application and related requirements may change and we are not responsible for updating this information. By providing this information, we are not giving legal or tax advice. For advice on your specific situation, please contact your advisors.