Main Street Lending Program Update
On June 8, 2020, the Federal Reserve released a new set of answers to Frequently Asked Questions about its Main Street Lending Program. Although the program has not yet launched, forms of the loan participation agreement, borrower and lender certifications and covenants, and other required form agreements can be found on the Federal Reserve Bank of Boston’s Main Street Lending Program Forms and Agreements website.
The Federal Reserve established the Main Street Lending Program to support lending to small and mid-size businesses, in response to the economic crisis prompted by the spread of the COVID-19 pandemic. The Coronavirus Economic Stabilization Act of 2020 ("CESA"), which falls under Title IV, Subtitle A of the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), authorized Main Street Lending Program.
The program consists of three loan facilities: the Main Street New Loan Facility ("MSNLF"), the Main Street Priority Loan Facility ("MSPLF"), and the Main Street Expanded Loan Facility ("MSELF"). U.S. businesses may be eligible for a Main Street loan if they meet either of the following conditions: (1) the business (together with its affiliates) has 15,000 employees or fewer; or (2) the business (in the aggregate with those of its affiliates) had 2019 revenues of $5 billion or less. Unlike loans available under the CARES Act's Paycheck Protection Program, these loans cannot be reduced through loan forgiveness.
The Federal Reserve has changed some of the features of the Main Street loans to make them more attractive to businesses that were in good financial condition before the onset of COVID-19, but now need loans to address temporary cash flow interruptions. Main Street loans each have a 5-year term, with floating rates. Principal payments are deferred during the first two years and interest payments are deferred during the first year.
Pursuant to the newly released terms, loans issued under MSNLF will range in size from $250,000 to the lesser of $35 million or an amount that, when added to the borrower's existing outstanding and undrawn debt, does not exceed 4x 2019 EBITDA. Loans issued under MSPLF will range in size from $250,000 to the lesser of $50 million or an amount that, when added to the borrower's existing outstanding and undrawn debt, does not exceed 6x 2019 EBITDA, and must be pari passu or senior to other outstanding secured debt. However, a MSPLF loan may be used to refinance existing debt owed to another lender at the time of origination. Borrowers can increase existing debt under MSELF by borrowing an additional $10 million to the lesser of $300 million or an amount that, when added to the borrower's existing outstanding and undrawn debt, does not exceed 6x 2019 EBITDA, and any collateral securing the pre-existing credit facility must also secure the upsized tranche on a pari passu basis. Prepayment of any of the Main Street loans will be permitted without penalty.
Borrowers must make certain certifications and covenants. These include the absence of a conflict of interest, the unavailability of adequate credit from other sources, and the borrower's solvency. However, a borrower that is not able to pay debts as they become due as a result of reduced business activity due to stay at home orders, social distancing, or the unexpected unavailability of sources of credit due to the COVID-19 disruptions will not be barred from participating. A borrower must also certify that it has a reasonable basis to believe that it will be able to meet its financial obligations for at least the next 90 days, after the loan origination.
Compensation caps, stock repurchase restrictions, and prohibitions against declaring dividends also apply during the term of any Main Street loan and for a period of one year after the loan is no longer outstanding.
Other than using MSPLF loan funds to refinance existing debt at the time of origination, a borrower must commit to refrain from (a) repaying principal and interest of other debt, unless the payment is mandatory and due and (b) seeking to cancel or reduce committed lines of credit, unless the borrower has first repaid the new loan in full.
Unlike loans under the Paycheck Protection Program, there is no requirement that funds received from a Main Street loan be used only for payroll, mortgage interest, rent, and utilities. However, borrowers should make commercially reasonable efforts to maintain payroll and retain employees. A company that has already reduced its workforce will not be barred from participating in the program for that reason.
Further information about this program, which we anticipate will launch soon, is available at the website of the Federal Reserve Bank of Boston.