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Legal Update

Apr 10, 2020

Money for Main Street: Fed Releases Terms of Main Street Lending Facilities

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On April 9, 2020, the Federal Reserve Board (“Fed”) announced details of its Main Street Lending Program through which it will purchase up to $600 billion in loans from eligible lenders using funds appropriated to it under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) to support lending to small and medium-sized businesses impacted by the coronavirus disease 2019 (“COVID-19”) pandemic (the “Main Street Facility”). Under this emergency lending program, participating lenders may originate new Main Street loans or use Main Street loans to increase the size of existing loans to businesses. The program, established under authority granted to the Fed under section 13(3) of the Federal Reserve Act, will cease participations on September 30, 2020 unless extended by the Treasury Department and the Fed.

Borrower Eligibility

Businesses created or organized in the U.S. or under U.S. laws that were in good financial standing before the COVID-19 crisis are eligible to obtain a Main Street loan if they have either (i) no more than 10,000 employees or (ii) 2019 annual revenues of less than $2.5 billion. Eligible borrowers also must have significant operations in and a majority of employees based in the U.S. Nonprofit entities are ineligible for Main Street loans. Unlike PPP loans, Small Business Administration affiliation rules do not apply to Main Street loans. This, coupled with the Main Street Lending Program’s accessibility to much larger businesses, will mean that many private equity- and venture capital-owned firms that were ineligible for PPP loans should be able to participate in the Main Street Lending Program, provided they satisfy other eligibility requirements, including the leverage restrictions described below. Additionally, much of the real estate industry should be able to participate in the Main Street Lending Program.

Companies that have taken advantage of the Small Business Administration’s Paycheck Protection Program (“PPP”) may obtain both a PPP loan and a Main Street loan. Businesses with existing credit facilities, however, will only be eligible under the Main Street Lending Program either to obtain a new Main Street loan or upsize an existing loan—not both.

Key Terms

Loan sizes for new Main Street loans (i.e., those originated on or after April 8, 2020) will range from a minimum principal amount of $1 million up to a maximum principal amount that 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, is less than or equal to four times the borrower’s 2019 earnings before interest, taxes, depreciation and amortization (“EBITDA”). The maximum size for the upsized tranche of any existing loans (i.e., those originated before April 8, 2020) will be the lesser of (i) $150 million, (ii) 30% of the borrower’s s existing outstanding and committed but undrawn bank debt or (iii) an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, is less than or equal to six times the borrower’s 2019 EBITDA. For some borrowers with existing credit facilities, the upsizing option will offer a higher maximum loan amount under the Main Street Lending Program.

New Main Street loans will be unsecured. All Main Street loans will have a term of 4 years, may be prepaid without penalty and will be subject to an adjustable interest rate of 2.5%-4% over the Secured Overnight Financing Rate, which is currently at .01%. Amortization on Main Street loans will be deferred for one year and no payments of principal or interest will be due during this period.

Borrowers of Main Street loans will pay an origination or “upsizing” fee to the lender of 1% of the principal amount of the loan or upsized tranche, as applicable. Additionally, the lender will be required to pay the Main Street Facility a facility fee of 1% of the principal amount of any loan participation purchased by the Main Street Facility established by the Fed and may elect to pass this fee on to the borrower. Unlike the popular Paycheck Protection Program created under Title I of the CARES Act to provide aid to small businesses, Main Street loans will not be eligible for loan forgiveness.

Certifications

Various borrower and lender certifications will be required in connection with each Main Street loan, including the following:

Borrower Certifications

  • The borrower will not use the proceeds of the loan (or upsized tranche) to repay other loan balances and will not repay other debt of equal or lower priority (other than mandatory principal payments) until the Main Street loan is fully repaid.
  • The borrower will not seek to cancel or reduce any of its outstanding lines of credit.
  • The borrower requires financing due to the exigent circumstances presented by COVID-19, and, using the proceeds of the Main Street loan, will make reasonable efforts to maintain its payroll and retain its employees during the term of the loan. (The extent to which borrowers may be required to rehire employees that were recently terminated or furloughed has not been addressed in Treasury Department or Fed guidance.) 
  • The borrower meets the EBITDA leverage condition for the applicable loan; i.e.,
    • For new Main Street loans, when added to the borrower’s existing outstanding and committed but undrawn debt, the loan amount is less than or equal to four times the borrower’s 2019 EBITDA; and
    • For the upsized loans, when added to the borrower’s existing outstanding and committed but undrawn debt, the upsized tranche amount is less than or equal to six times the borrower’s 2019 EBITDA).
  • The borrower will follow compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act; i.e.,
    • Compensation restrictions: For officers that made over $425,000 in 2019, borrowers may not, beginning the year of the loan and continuing for the one-year period following the satisfaction of the loan, pay an officer more compensation than that officer received in 2019 or pay severance/other benefits that exceed twice the maximum total compensation in 2019. For officers that made over $3 million in 2019, borrowers may not, beginning the year of any loan and continuing for the one-year period following the satisfaction of the loan, pay an officer more than $3 million plus 50% of the amount over $3 million received by the officer in 2019.
    • Stock repurchase/capital distributions prohibitions: Borrowers with direct loans cannot, absent a waiver from the Fed, engage in stock buybacks, unless required under pre-existing contracts, or pay dividends or make other capital distributions, until one year after the date the Main Street loan is no longer outstanding. (Exceptions to this requirement, such as whether tax distributions to owners of S-corporations, limited liability companies, partnerships and other pass-through entities will be permitted, have not been addressed by Fed or Treasury Department guidelines.)
  • The borrower is eligible to participate in the Main Street Lending Program, including in light of the conflicts of interest prohibition in section 4019(b) of the CARES Act (“Conflicts of Interest Prohibition”)—i.e., Businesses in which the President, Vice President, an executive department head, Member of Congress—or such individual’s spouse, child (including adult children), son-in-law, or daughter-in-law—own at least a 20% direct or indirect equity stake will not be eligible for emergency relief funds under Title IV of the CARES Act, including Main Street Lending Program funds.

Lender Certifications

  • The proceeds of the loan will not be used to repay or refinance pre-existing loans or lines of credit made by the lender to the borrower.
  • The lender will not cancel or reduce any existing lines of credit outstanding to the borrower.
  • The lender is eligible to participate in the Main Street Lending Program, including in light of the Conflicts of Interest Prohibition.

Main Street Lenders

Eligible lenders under the Main Street Lending Program are U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies. Under the program, lenders will be required to retain a 5 percent share of the new loans or upsized tranche of an existing loan, as applicable, and will sell the remaining 95 percent to the Main Street Facility. The Main Street Facility will pay eligible lenders 0.25% of the principal amount of the participation in eligible loans (or upsized tranches, as applicable) per annum for loan servicing.

Documentation

Neither the Department of Treasury nor the Fed has issued any standard form loan applications or other standard form documentation for the Main Street Loan Program.

Changes to Main Street Lending Facility and Terms

The Board of Governors of the Federal Reserve System and the Secretary of the Treasury may make adjustments to the terms and conditions of the Main Street Facility and will announce any changes on the Board’s website.

Before applying for a Main Street loan, borrowers should review existing credit agreements, governing documents and other contracts to identify any restrictions on the incurrence of additional indebtedness.

Other Fed Section 13(3) Facilities

On April 9, 2020, the Fed also issued term sheets for the Term-Asset Backed Securities Loan Facility (“TALF”), the Primary Market Corporate Credit Facility (“PMCCF”), the Secondary Market Corporate Credit Facility (“SMCCF”), the Municipal Liquidity Facility (“MLF”) and the Paycheck Protection Program Lending Facility (“PPPLF”). All of the term sheets can be found at https://www.federalreserve.gov/newsevents/pressreleases/monetary20200409a.htm

  • The TALF will purchasethe triple-A rated tranches of both outstanding commercial mortgage-backed securities and newly issued collateralized loan as well as asset backed securities (“ABS”). All or substantially all of the credit exposures underlying eligible ABS must have been originated by a U.S. company, and the issuer of eligible collateral must be a U.S. company.
  • The PMCCF will purchase from eligible issuers corporate bonds with maturity dates of four years or less. An eligible issuer is a business that is created or organized in the U.S. or under U.S. laws with significant operations in and a majority of its employees based in the U.S. The issuer cannot be an insured depository institution or depository institution holding company, as those terms are defined in the Dodd-Frank Act. Eligible borrowers that participate in the Main Street Lending Program may not also participate in the PMCCF.
  • The SMCCF will purchase certain commercial paper in the secondary market and the MLF will purchase short term notes directly from States, counties and cities that meet stated population requirements.
  • The PPPLF will lend to banks that originate PPP loans and take the loans as collateral. This Facility is to facilitate the PPP loan program.

Seyfarth is actively monitoring all aspects of federal COVID-19 business stimulus funding legislation and guidance impacting our clients.