Fed Updates Main Street Lending Program for BusinessesMay 4, 2020 – Article
Title IV of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) provides for up to $600 billion in loans and loan guarantees to Federal Reserve programs and facilities to be made available to mid-size businesses and nonprofit organizations under 10,000 employees, aimed to ensure credit flows to these small and mid-sized businesses that were in good standing before the COVID-19 pandemic (the “Main Street Lending Program”). Unlike loans issued under the CARES Act Paycheck Protection Program, these loans are not eligible to be forgiven. On April 9, 2020, the Federal Reserve released term sheets for the two facilities created under the Main Street Lending Program: the Main Street New Loan Facility (“MSNLF”) and the Main Street Expanded Loan Facility (“MSELF”) used to upsize an existing eligible term loan facility. The Department of the Treasury, using funds appropriated under section 4027 of the CARES Act, will provide $75 billion in equity to a single common special purpose vehicle (SPV) in connection with the MSNLF and the MSELF. The Federal Reserve Banks will lend the remainder of funds to the SPV for the MSNLF and the MSELF. This news alert will focus only on new loans under the MSNLF. The application process for the MSNLF is not yet open and the standards described below may evolve as the Federal Reserve implements rulemaking. Potential borrowers are strongly encouraged to evaluate the MSNLF potential options now to be prepared to act quickly when the application process is ready to proceed.
ELIGIBLE NEW LOAN TERMS
- New unsecured term loans which originate on or after April 8, 2020.
- Minimum amount: $1M.
- Maximum amount: $25M or an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed 4x 2019 EBITDA.
- Maturity: 4 years
- Amortization of principal and interest is deferred for one year.
- No Loan Forgiveness.
- Business with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues.
- Must be organized in the United States or under the laws of the United States with significant operations in and a majority of their employees based in the United States.
- Must be solvent.
- May only participate in one of the MSNLF, the MSELF or the separate Primary Market Corporate Credit Facility for U.S. issuers of certain corporate debt. Participation in the Paycheck Protection Program established under the CARES Act may also be eligible to participate in the MSNLF or the MSELF.
U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies. Non-bank lenders are not eligible.
CONDITIONS AND RESTRICTIONS
A Borrower must attest:
- that it will not seek to cancel or reduce any of its outstanding lines of credit with the lender or any other lender.
- that it requires financing due to the circumstances presented by COVID-19.
- that it will make reasonable efforts through use of the proceeds of the loan to maintain its payroll and retain its employees during the term of the loan.
- that it meets the EBITDA leverage condition for an “Eligible Loan” (described above).
- that it will follow compensation, stock repurchase, and dividend and other capital distribution restrictions that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act (see below).
- that it is eligible to participate in the facility, including any conflicts of interest as set forth in section 4019(b) of the CARES Act relating to ownership interests by certain government officials and their family members.
A Borrower also must:
- Agree to refrain from using the proceeds of the loan to repay other loan balances.
- Agree to refrain from repaying other debt of equal or lower priority, with the exception of mandatory principal payments, unless the borrower has first repaid the Main Street Lending Program loan in full.
The compensation, stock repurchase and capital distribution restrictions that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act are:
- No Stock Repurchases – Until 12 months after a direct loan is no longer outstanding, there can be no purchase of equity securities listed on a national securities exchange of (a) the business receiving the loan or (b) any parent company of the business while the direct loan is outstanding, with the limited exception if required under a contractual obligation in effect as of the date of enactment of the CARES Act. Please note this might be a significant issue for ESOP company borrowers.
- No Dividends or Capital Distributions – Until 12 months after a direct loan is no longer outstanding, no payment of dividends or other capital distributions can be made with respect to the common stock of the business receiving the loan.
- Compensation Restrictions – While the loan is outstanding and for one year thereafter:
- No officer or employee of the business whose calendar year 2019 total compensation exceeded $425,000 will: (a) receive from the business total compensation that exceeds during any consecutive 12-month period total compensation received by the person from the business in calendar year 2019, (b) receive severance pay or other termination benefits exceeding two times the maximum total compensation received by the person from the business in calendar year 2019.
- No officer or employee of the business whose total compensation exceeded $3 million in calendar year 2019 may receive during any consecutive 12-month period total compensation in excess of (a) $3 million plus (b) 50% of the compensation over $3 million of total compensation received from the business in calendar year 2019.
- Facility Fee: A lender will pay or may require the borrower to pay to the SPV, a facility fee of 100 basis points of the principal amount of the loan participation purchased by the SPV.
- Loan Origination Fee: A borrower will pay a lender an origination fee of 100 basis points of the principal amount of the new or upsized loan.
- Loan Servicing Fee: The SPV will pay a lender 25 basis points of the principal amount of the new or upsized loan.
It is expected that the Federal Reserve will likely make adjustments, clarifications and other rulemaking prior to opening the application process for this program.
Author: David R. Johanson (Partner-in-Charge, Napa)
Hawkins Parnell & Young's national litigation team is helping businesses across the United States navigate unprecedented legal challenges arising from the COVID-19 pandemic. Visit our COVID-19 Resource Center for the latest insights and guidance.