Federal Reserve Further Expands Main Street Lending Program

Client Alert

Client Alert
June 15, 2020

The Federal Reserve Board last Monday expanded its Main Street Lending Program, the $600 billion program of financial assistance to small and medium-sized businesses authorized under Title IV of the CARES Act, to allow more small and medium-sized businesses to be able to receive support. The Fed lowered the minimum loan amount, raised the maximum loan limit, adjusted the principal repayment schedule to begin after two years, and extended the term to five years, providing Eligible Borrowers with greater flexibility in repaying the loans. The Main Street Lending Program will accept loans that were originated under the previously announced terms, if funded before June 10, 2020.

However, the Fed has yet to open the program formally. The Fed said it "expects the Main Street program to be open for lender registration soon and to be actively buying loans shortly afterwards." The Fed has not yet circulated a proposed loan application or other key details of the program, discussed below. 

The requirements for each facility under the Main Street Lending Program are minimum requirements. Under all of the Eligible Loan options, Eligible Lenders must apply their own underwriting standards to measure an Eligible Borrower's income and whether to make the loan, can establish their own collateral requirements, and can require additional information and documentation. Eligible lenders may use their own loan documentation but are required to include additional terms that have yet to be provided by the Federal Reserve. An Eligible Lender is not required to make a loan under any of the Main Street Lending facilities even if a borrower meets the requirements, and nothing further is required to originate the maximum loan amounts permitted. 

Additional information regarding the official launch date, credit administration, and loan servicing will be made available on the Fed's website at a later date. Potential borrowers are encouraged to speak with potential lenders about the anticipated documentation requirements and to begin assembling a credit package as if it were requesting a traditional commercial loan.

The changes announced last week include:

  • Lowering the minimum loan size for certain loans to $250,000 from $500,000.

  • Increasing the maximum loan size for all facilities.

  • Increasing the term of each loan to five years, from four years.

  • Extending the repayment period for all loans by delaying principal payments for two years rather than one year. Interest payments, however, must commence one year after the loan is made.

  • Raising the Fed's participation to 95% for all loans.

 

The Fed's chart below (slightly modified) provides additional details on the changes.

Main Street Lending Program Loan Options New Loans Priority Loans Expanded Loans
Term 5 years (previously 4 years)
Minimum Loan Size $250,000
(previously $500,000)
$10M
(same as before)
Maximum Loan Size The lesser of $35M, or an amount that, when added to outstanding and undrawn available debt, does not exceed 4.0x adjusted EBITDA
(previously $25M)
The lesser of $50M, or an amount that, when added to outstanding or undrawn available debt, does not exceed 6.0x adjusted EBITDA
(previously $25M)
The lesser of $300M, or an amount that, when added to outstanding or undrawn available debt, does not exceed 6.0x adjusted EBITDA
(previously $200M; also previously there was a limitation on loan size of 35% of outstanding or undrawn available debt that has been eliminated)
Risk Retention 5% (same as before) 5% (previously 15%) 5% (same as before)
Principal Repayment Principal deferred for two years, years 3-5: 15%, 15%, 70%
(previously principal deferred for one year and 33.33% repayment due in years 2-4)
Principal deferred for two years, years 3-5: 15%, 15%, 70%
(previously principal deferred for one year and 15%, 15%, 70% repayment due in years 2, 3, and 4, respectively)
Interest Payments Deferred for one year (same as before)
Rate LIBOR + 3% (same as before)

This is the second time that the Fed has expanded the program in response to public input. Previously, the Fed expanded the loan options available to businesses, by creating the Priority Loan Facility, and increased the maximum size of businesses that were eligible for support under the program (now up to 15,000 employees or up to $5.0 billion in consolidated gross revenue). 

Some questions remain about the expanded program, however:

1. Eligible Borrowers: Nonprofit organizations continue to be ineligible. The Fed said, however, that it "is working to establish a program soon for these organizations." Portfolio businesses owned by private equity that otherwise meet the borrower eligibility requirements designated in the program can apply but are subject to the SBA's affiliation rules in determining the employee and revenue cap stated above.

2. "Significant Operations" Requirement: As previously required, the borrower must have been 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. The new guidance does not define what constitutes "significant operations in the United States".

3. "Ineligible Business": Businesses that are ineligible under SBA guidelines, as modified by the Paycheck Protection Program, continue to be ineligible under this program. Many questions have arisen as to the definition of "ineligible businesses" under the SBA rules, particularly as to real estate developers and landlords. The new guidance does not clarify these rules.

Ineligible businesses under the SBA regulations include, among others, those:

  • engaged in the business of lending, such as banks, finance companies, and factors (pawn shops, although engaged in lending, may qualify in some circumstances).

  • owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds (except Eligible Passive Companies as defined in the SBA regs).

  • located in a foreign country (businesses in the U.S. owned by aliens may qualify).

  • engaged in any illegal activity.

  • having defaulted on a Federal loan or Federally assisted financing, resulting in the Federal government or any of its agencies or departments sustaining a loss in any of its programs;

  • engaged in political or lobbying activities.

  • speculative businesses (such as oil wildcatting).

 

4. Required Borrower Certifications and Covenants: The previous certifications required of Eligible Borrowers (no repayment of other debt, no cancelation of lines of credit, a reasonable basis to believe that, as of the date of origination of the Eligible 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 that time period) continue to apply.

5. "Commercially Reasonable Efforts":  A Borrower must undertake good-faith efforts to maintain payroll and retain employees, in light of its capacities, the economic environment, its available resources, and the business need for labor. Borrowers that have already laid-off or furloughed workers as a result of the disruptions from COVID-19 are eligible to apply for Main Street loans

6. Eligible Lenders: Non-bank financial institutions continue to be ineligible, although the Fed has said that it was considering expanding the Eligible Lender pool.

 

7. Eligible Loans: As before, prepayment is permitted without penalty. Unlike loans under the Payment Protection Program, none of the loans under the Main Street facilities is forgivable. An Eligible Borrower can apply under any of the three Main Street Lending Facilities; however, an Eligible Borrower cannot receive a loan from more than one facility.  A borrower may obtain a loan under any of these facilities and also under the Paycheck Protection Program. However, it is unclear whether a Paycheck Protection Program loan is included as "outstanding and committed but undrawn debt" under these facilities for purposes of determining the maximum loan amount. As the Main Street Lending Program supplements existing credit facilities in its calculation of an Eligible Borrower's maximum loan amount, it is likely that a Paycheck Program Protection loan will be included in its outstanding loan commitments, at least as to amounts not forgivable.

8. Use of Proceeds: The Main Street Lending Program funds are to be used to maintain an Eligible Borrower's ongoing operations and retain employees. Current guidance does not prevent Main Street Loan Program loans from being used to expand operations or add employees. However, the Fed has commented that the Main Street Lending Program "is intended to help companies that were in sound financial condition prior to the onset of the COVID-19 pandemic maintain their operations and payroll until conditions normalize." As such, the Main Street Loan Program may not be available if an otherwise Eligible Borrower's sole purpose is to expand or to purchase discretionary assets. There are also restrictions on using the various facilities' proceeds to make unscheduled loan pay downs and loan payoffs until a Main Street loan is paid off, except under certain circumstances. The Priority Loan Facility is the only facility that allows an Eligible Borrower to refinance existing debt under certain circumstances.

9. Subordination: As before, in the case of a loan under the New Loan Facility, the Eligible Loan may not, at the time of origination or at any time during the term of the loan, be contractually subordinated in terms of priority to any of the Eligible Borrower’s other loans or debt instruments. In the case of a loan under the Priority Loan Facility and the Expanded Loan Facility, at the time of origination and at all times the Eligible Loan is outstanding, the Eligible Loan must be senior to or pari passu with, in terms of priority and security, the Eligible Borrower’s other loans or debt instruments, other than mortgage debt. The new guidance does not explain the difference in subordination requirements. 

10. Loan Participations: As before, the Fed's Special Purpose Vehicle ("SPV") established under the program will purchase at par value a 95% participation in the Eligible Loan. The sale of the 95% participation in the Eligible Loan to the SPV will be structured as a “true sale.” The sale must be completed expeditiously after the Eligible Loan’s origination, meaning the Eligible Lender must be prepared to fund 100% of the loan at closing. (As a practical matter, the sale is likely to take place contemporaneously with funding.) The SPV and the Eligible Lender thereafter will share risk in the Eligible Loan on a pari passu basis. The Eligible Lender must retain its 5% of the Eligible Loan until it matures or the SPV sells all of its participation, whichever comes first.

11. Required Lender Certifications and Covenants: The same certifications and covenants that will be required from Eligible Lenders are still in place, among which are: 

a. The Eligible Lender must not request that the Eligible Borrower repay debt extended by the Eligible Lender to the Eligible Borrower, or pay interest on such outstanding obligations, until the Eligible Loan is repaid in full, unless the debt or interest payment is mandatory and due, or in the case of default and acceleration. 

b. The Eligible Lender must not cancel or reduce any existing committed lines of credit to the Eligible Borrower, except in the event of a default. 

c. The Eligible Lender must certify that the methodology used for calculating the Eligible Borrower’s adjusted 2019 EBITDA for the leverage requirement is the methodology it has previously used for adjusting EBITDA when extending credit to the Eligible Borrower or similarly situated borrowers on or before April 24, 2020. 

 

12. Fees. The Eligible Lender must pay the SPV a "transaction fee" of 100 basis points on 100% of the principal amount of the Eligible Loan at the time of origination. As before, the Eligible Lender may pass on this fee to the Eligible Borrower. The Eligible Lender may charge the Eligible Borrower an origination fee of up to 100 basis points of the amount of the Eligible Loan. As before, the SPV will pay the Eligible Lender an annual servicing fee of 25 basis points of the 95% SPV participation in the Eligible Loan.

13. Other Provisions: Previous requirements related to compensation, stock repurchase, and capital distribution restrictions (except for tax payments by pass-through entities) that apply to all direct loan programs under the CARES Act remain the same for all the facilities.

See the following links, including an extensive FAQ list, for more information on these updated facilities:

 
See our previous Client Alert on the Main Street Lending Program Federal Reserve Announces Funding for Main Street Lending Program and Other Actions to Bolster the Economy - April 9, 2020 and Federal Reserve Modifies and Expands Main Street Lending Program - May 1, 2020. 

This client alert is one of a series as we track developments in the implementation of the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act").  For more information on the CARES Act, please see our prior client alerts: 
 

 

Related Topics
Related Practices
RELATED PEOPLE
Jose Sariego

Jose Sariego

Partner
YOU MIGHT ALSO LIKE
Client Alert July 14, 2020
On Tuesday, July 14, 2020, the City Commission adopted an emergency ordinance adding a section to the City’s Zoning Code to safely expand and create economic opportunities for businesses and incorporate certain flexibilities for civic uses impacted by the COVID-19 pandemic. 
VIEW MORE