COVID-19 Resource Center

Main Street Lending Program Update

June 18, 2020Article

WHAT BUSINESSES NEED TO KNOW ABOUT THE MAIN STREET LENDING PROGRAM

June 2020 Update: We previously published an article about the Main Street Lending Program on May 4, 2020. Subsequent to the publication of that article, the Federal Reserve enhanced the program in certain respects. This article focuses on the current version of the Main Street Lending Program.

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, the Main Street Lending Program loans are not eligible to be forgiven. On June 9, 2020, the Federal Reserve released updated term sheets for the three facilities created under the Main Street Lending Program, as follows: the Main Street New Loan Facility (“MSNLF”), the Main Street Priority Loan Facility (“MSPLF”) and the Main Street Expanded Loan Facility (“MSELF”). The MSPLF may be particularly useful for employee stock ownership plan and trust (“ESOP”) sponsors because it allows loan funds to be used to refinance existing debt and could apply to promissory notes that originated in an ESOP transaction, which may need to be restructured in light of the economic distress caused by COVID-19.

The U.S. 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 Main Street Lending Program. The Federal Reserve Banks will lend the remainder of funds to the SPV for the Main Street Lending Program. Potential borrowers should evaluate the loan terms to determine the lending alternatives that may be available to them and should act promptly to ensure availability of loan funds. U.S. businesses may be eligible for loans under the Main Street Lending Program if they satisfy either of the following conditions: (1) the business has 15,000 employees or fewer; or (2) the business had 2019 revenues of $5 billion or less. Borrowers 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. It is interesting to note that borrowers may pursue a loan under the Main Street Loan Program even if they have borrowed funds under the CARES Act Paycheck Protection Program.

Loans issued under the Main Street Lending Program have a five-year maturity (four years under the previous program), deferral of principal payments for two years, and deferral of interest payments for one year. All loans are pre-payable without penalty. The June 8th Federal Reserve actions decreased the minimum loan size under the Main Street Lending Program from $500,000 to $250,000 to be more responsive to small business and also implemented similar loan programs for non-profit institution borrowers.

LOAN TERMS UNDER THE MAIN STREET LENDING PROGRAM

The following chart summarizes the loan terms of the three lending alternatives under the Main Street Lending Program:

MAIN STREET LOAN PROGRAM OPTIONS

Type of Loan

MSNLF

MSPLF

MSELF

Loan Term

5 years

5 years

5 years

Minimum Loan Amount

$250,000

$250,000

$10,000,000

Maximum Loan Amount

Lesser of $35M or 4 Times 2019 adjusted EBITDA

Lesser of $35M or 6 Times 2019 adjusted EBITDA

Lesser of $300M, 35% of outstanding and undrawn available debt, or 6 Times 2019 adjusted EBITDA

Principal Repayment

Schedule

Year 3: 15%

Year 4: 15%

Year 5: 70%

Year 3: 15%

Year 4: 15%

Year 5: 70%

Year 3: 15%

Year 4: 15%

Year 5: 70%

Interest Rate

LIBOR + 3%

LIBOR + 3%

LIBOR + 3%

CONDITIONS AND RESTRICTION

A Borrower must attest:

  • that it will refrain from repaying the principal balance or interest on any debt until the Main Street Lending Program loan is repaid in full, unless the debt or interest payment is mandatory and due.
  • that it will not seek to cancel or reduce any of its outstanding lines of credit with the Main Street Lending Program lender or any other lender during the term of the loan.
  • 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. The June Federal Reserve guidance clarifies that to make “commercially reasonable efforts”, borrowers should undertake good faith efforts to maintain payroll and retain employees in light of the borrower’s capacities, the economic environment, the borrower’s available resources, and the business’ need for labor. The guidance also confirms that businesses that have already laid-off or furloughed workers as a result of COVID-19 are still eligible to apply for loans under the Main Street Lending Program.
  • that it meets the EBITDA leverage conditions applicable to the loan alternative that it is seeking (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.

Other Restrictions:

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 that 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. Again, this may present a complex issue for ESOP corporation borrowers. Notably, the Federal Reserve has clarified that S-corporations and other tax pass-through entities may continue to make distributions to the extent reasonably required to cover its owners’ tax obligations in respect of the borrower’s earnings.
  • Compensation Restrictions – While the loan is outstanding and for one year thereafter:
  1. 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 such person from the business in calendar year 2019, or (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.
  2. 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.

Loan Applications

The Federal Reserve has published forms of borrower and lender certifications and covenants and has opened its lender certification process. It is not providing loan documentation to eligible lenders but has provided detailed guidance on the structure of such documentation to lenders. Hawkins Parnell & Young, LLP stands ready to assist your company with any questions or assistance in determining eligibility for loan assistance through the Main Street Loan Program and to navigate your business through the loan application process. We also are available to advise regarding any other issues affecting your business arising from COVID-19.


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.