New Stimulus: Now For Middle Market Businesses

Main Street Lending Program

WHAT IS IT?

The Federal Reserve issued guidance on April 9, 2020, the Main Street Lending Program, which sets forth two (2) lending facilities: the Main Street New Loan Facility and the Main Street Expanded Loan Facility.  These programs are designed to help small-to-medium-sized businesses that may not be eligible for financial assistance through the various loan programs established by the Small Business Administration; although, the Federal Reserve has stated that businesses that have taken advantage of the Paycheck Protection Program under the CARES Act may also take out loans under the Main Street Lending Program.  The Federal Reserve Bank has committed to lend up to $600 billion into a single common special purpose vehicle (“SPV”).

Under the Main Street Lending Program, eligible lenders will grant unsecured term loans to eligible borrowers on or after April 8, 2020.   If the loan is eligible under the terms of the Main Street New Loan Facility, the SPV will purchase a 95% participation in such a loan, with eligible lenders retaining a 5% participation.  Alternatively, under the Main Street Expanded Loan Facility, eligible lenders will grant additional funds to eligible borrowers under loans originated prior to April 8, 2020, and the SPV will only purchase a 95% participation in the upsized tranche of the eligible loan.  Eligible lenders are the same under both lending facilities and are listed as U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies.

WHAT BUSINESSES ARE ELIGIBLE?

The criteria for being an eligible borrower is the same under both lending facilities.  Eligible borrowers must (i) have less than 10,000 employees or less than $2.5 billion in 2019 annual revenues, and (ii) be created or organized in the United States with significant operations in and a majority of employees based in the United States.  An eligible borrower cannot participate in both the Main Street New Loan Facility and the Main Street Expanded Loan Facility.

WHAT ARE THE TERMS OF THE LOANS?

Under both lending facilities, an eligible loan must have the following features:

• 4-year maturity
• Amortization of principal and interest deferred for one year
• Adjustable interest rate of the Secured Overnight Financing Rate (SOFR) + 250-400 bps
• Minimum loan size of $1 million
• No prepayment penalties

WHAT IS THE DIFFERENCE BETWEEN THE TWO PROGRAMS?

A key difference between the two lending facilities is the maximum amount of eligible loans.  For the Main Street New Loan Facility, the maximum loan size is the lesser of (i) $25 million or (ii) an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed 4 times the borrower’s 2019 EBITDA. For the Main Street Expanded Loan Facility, the maximum additional amount that may be loaned to the borrower is the lesser of (i) $150 million, (ii) 30% of the eligible borrower’s existing outstanding and committed by undrawn bank debt or (ii) an amount that, when added to the borrower’s existing outstanding and committed by undrawn debt, does not exceed 6 times the borrower’s 2019 EBITDA.

ARE THERE ANY RESTRICTIONS ON THE USE OF PROCEEDS?

Under both lending facilities, the eligible borrower must certify that with regard to the loans or upsized tranche:

• It will refrain from using the proceeds to repay other loan balances, including repayment of 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 the eligible lender or any other lender.
• Such financing is necessary due to exigent circumstances presented by the COVID-19 global pandemic and that it will use reasonable efforts to maintain its payroll and retain its employees during the term of the eligible loan.
• It meets the EBITDA leverage condition as set forth in the maximum loan size formula above.
• It will follow certain compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under the CARES Act.
• It is eligible to participate in the applicable lending facility, including in light of the conflicts of interest prohibition in the CARES Act.

Both lending facilities will cease purchasing participations in eligible loans on September 30, 2020.