Loans Will Provide Additional Support for Small and Mid-sized Businesses

On April 9, 2020, the Federal Reserve released the terms of its Main Street Lending Program, a $600 billion loan fund for U.S. companies. We’ve summarized these terms below.

What companies should consider participating in the Main Street Lending Program?

The Main Street Lending Program will be available to U.S. companies with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues.

If your company is ineligible for participation in the Paycheck Protection Program (PPP) or the Economic Injury Disaster Loans (EIDL) due to size limitations, you may consider participating in the Main Street Lending Program. Alternatively, if your company requires significantly more liquidity than can be provided by the PPP or the EIDL, you may also consider participating. 

However, keep in mind that loans issued under Main Street Lending Program are not forgivable, are subject to higher interest rates, and include restrictions on the company’s debt, stock repurchases, distributions and compensation, as described in more detail below. Also, the Federal Reserve has not confirmed which affiliation rules, if any, will apply to the 10,000-employee threshold.

How will the program work?

The Main Street Lending Program has two components: (i) the “Main Street New Loan Facility” for new loans; and (ii) the “Main Street Expanded Loan Facility” to increase the size of existing loans (loans that originated before April 8, 2020). Companies may participate in the Main Street New Loan Facility or the Main Street Expanded Loan Facility, but not both. However, companies that participate in either facility under the Main Street Lending Program may also participate in the PPP and EIDL. 

Lenders will retain a 5% share of the new loan or upsized tranche of an existing loan, selling the remaining 95% to the Federal Reserve’s Main Street New Loan Facility or Main Street Expanded Loan Facility, as applicable. Companies will pay lenders under the Main Street Lending Program a fee equal to 100 basis points of the principal amount of the new loan or upsized tranche of an existing loan to be sold to the Main Street New Loan Facility or Main Street Expanded Loan Facility, as applicable (i.e., 95% of the principal amount of new loan or the upsized tranche of an existing loan).

What are the terms of the new loans and upsized loans to be issued under the program?

• 4-year maturity;
• Principal and interest payments deferred for one year;
• Adjustable interest rate based on the Secured Overnight Financing Rate (currently 0.01%) plus 250-400 basis points;
• Prepayment without penalty;
• Minimum loan size of $1 million;
• For new loans issued under the Main Street New Loan Facility, a maximum loan size equal to the lesser of: (i) $25 million, or (ii) an amount that, when added to the borrower’s existing outstanding but undrawn debt, does not exceed 4x the borrower’s 2019 EBITDA;
• For upsized loans under the Main Street Expanded Loan Facility, a maximum loan size equal to the lesser of: (i) $150 million, (ii) 30% of the borrower’s existing outstanding but undrawn bank debt, or (iii) an amount that, when added to the borrower’s existing outstanding but undrawn debt, does not exceed 6x the borrower’s 2019 EBITDA; and
• New loans issued under the Main Street New Loan Facility will be unsecured.

What restrictions will apply to companies that participate in the program?

• Borrowers must certify that they require financing due to the pandemic and that they will make efforts to maintain payroll and retain employees during the term of the loan. 
• Borrowers may not use the proceeds of the new loan or upsized loan to repay or refinance pre-existing loans or lines of credit outstanding with lenders under the Main Street Lending Program, including in the case of upsized loans, the pre-existing portion of the original loan.
• Borrowers may not cancel or reduce existing lines of credit outstanding with lenders under the Main Street Lending Program.
• Borrowers may not use the proceeds of the new loan or upsized loan to repay other loan balances or debt of equal or lower priority, with the exception of mandatory principal payments.
• Borrowers must comply with the following restrictions set forth in Section 4003(c)(3)(A)(ii) of the CARES Act for the duration of the loan plus one year:
  • Borrowers may not repurchase equity securities listed on a national securities exchange, except to the extent required under a contractual obligation in place as of March 27, 2020;
  • Borrowers may not pay dividends or make other capital distributions; and
  • Borrowers must comply with the following restrictions on compensation set forth in Section 4004 of the CARES Act:

• Officers or employees whose total compensation exceeded $425,000 in 2019 may not receive: (i) total compensation for any 12-month period that exceeds the total compensation received in 2019, or (ii) severance pay or other benefits upon termination that exceed 2x the compensation received in 2019.
• Officers or employees whose total compensation exceeded $3 million in 2019 may not receive total compensation for any 12-month period that exceeds the sum of: (i) $3 million and (ii) 50% of the excess over $3 million of total compensation received in 2019.

Note that the Federal Reserve has not confirmed whether the restrictions set forth in Section 4003(c)(3)(B) of the CARES Act will also apply to companies that participate in the Main Street Lending Program.[1]

When will companies be able to apply for a loan under the program?

The Federal Reserve has not released guidance on how companies can apply for loans through the new Main Street Lending Program. The Federal Reserve is taking comments on the terms of the program until April 16, 2020. 

Where can I find additional information?

Below are links to the term sheets for each facility under the Main Street Lending Program:

Main Street New Loan Facility Term Sheet

Main Street Expanded Loan Facility Term Sheet

You can stay up-to-date as the procedures for obtaining loans under the Main Street Lending Program are updated by visiting Farella Braun + Martel’s Coronavirus (COVID-19) Insights and Resources page.

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