The Federal Reserve (the “Fed”) announced the establishment of a $600 billion Main Street Lending Program (the “Program”) to support lending to small and medium-sized businesses impacted by the COVID-19 pandemic. The funds were appropriated under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The Program will be comprised of two lending facilities (the “Facilities”), the Main Street New Loan Facility (“MSNLF”) and the Main Street Expanded Loan Facility (“MSELF”).  Eligible Lenders (as defined herein) may originate new loans under MSNLF or increase the size of (or “upsize”) existing loans under MSELF to Eligible Borrowers (as defined herein).

Both MSNLF and MSELF offer potentially advantageous lending arrangements which could be used by lenders and borrowers in connection with: (a) the restructuring of existing loan facilities negatively impacted by the COVID-19 pandemic; and (b) forbearance and work-out with respect to existing loan facilities negatively impacted by the COVID-19 pandemic. But the term sheets for MSNLF and MSELF currently raise many questions and issues about terms of implementation. It is expected that additional guidance will come from the Fed and the United States Treasury (the “Treasury”) over the coming weeks.

The SPV

The Treasury will make a $75 billion equity investment from CARES Act funds in a special purpose vehicle (“SPV”). This equity investment will to enable up to $600 billion in liquidity commitments from the Fed. Under both Facilities, the Fed will commit to lend to the SPV and the SPV will then purchase 95% of the eligible loans (for MSELF, this means 95% of the increased amount of the existing loan) until September 30, 2020. Eligible Lenders will retain 5% of each eligible loan, with the risk shared on a pari passu basis between the SPV and the Eligible Lender.

Eligible Lenders

Eligible Lenders will originate and service the loans under the Facilities. Currently, “Eligible Lenders” for these Programs are: (1) U.S. insured depository institutions; (2) U.S. Bank Holding Companies; and (3) U.S. savings and loan holding companies.

Eligible Borrowers

Currently, “Eligible Borrowers” include businesses and non-profits with either a maximum of 10,000 employees or not more than $2.5 billion in 2019 annual revenue; however, a minimum size requirement has not been established.  The business must be created or organized in the United States or under the laws of the United States with significant operations and a majority of its employees based in the United States. Currently, there is no limit of foreign ownership of a US entity.  An Eligible Borrower cannot be a debtor in a bankruptcy proceeding.  An Eligible Borrower must also have been impacted by the COVID-19 pandemic. An Eligible Borrower under the Program may be a recipient of a Paycheck Protection Program (PPP) loan, however, such borrower may not participate in both MSNLF and MSELF. Borrowers who participate in the Primary Market Corporate Credit Facility may not participate in MSNLF or MSELF.

Eligible Loans

For MSNLF, eligible loans are those originated on or after April 8, 2020. All loans under MSNLF must be unsecured. For MSELF, eligible loans are term loans that originated before April 8, 2020 and have been subsequently upsized. An Eligible Borrower who has an existing loan with an Eligible Lender may choose to either upsize the existing loan using the MSELF program or enter in to a new loan under the MSNLF program.

General Loan Terms – applicable to both MSNLF and MSELF (for MSELF, applicable to “upsized tranche”)

  • Minimum loan size is $1 million
  • 4 year maturity (presumably amortized in equal principal installments over the final 3 years)
  • Adjustable rate: SOFR + 250-400 bps
  • Amortization of principal and interest deferred for 1 year
  • No prepayment penalty
  • Not eligible for forgiveness
  • Lenders may charge borrower an origination fee of 100 bps on the full principal amount of the loan
  • The SPV pays lenders a servicing fee of 25 bps per annum on the principal balance of the participation

Restrictions/Requirements on Recipient of Loan Funds

  • Borrower must attest that it requires financing due to exigent circumstances presented by the COVID-19 pandemic
  • Limits (to be further defined) on use of loan proceeds for paying existing loans and other debt of equal or lower priority
  • Existing lender cannot reduce or cancel existing lines of credit; Borrower cannot seek to cancel or reduce any existing lines of credit
  • Borrower must use loan proceeds to make reasonable efforts to maintain payroll and employees during the loan term
  • Borrower must attest to 2019 EBITDA leverage requirements
  • Borrower must intend to restore at least 90% of its employees who were employed on February 1, 2020 and all compensation and benefits to its employees not later than 4 months after the end of the public health emergency related to COVID-19 pandemic
  • Borrower will not outsource or offshore jobs until 2 years after the loan is repaid
  • Limits on compensation, distributions and stock repurchases
  • Borrower and lender must provide certifications regarding no conflict of interest

Key Differences Between MSNLF and MSELF

  • Collateral
    • MSNLF – unsecured
    • MSELF – any collateral securing an eligible loan (whether pledged under the terms of the original loan or at the time of upsizing), will secure the loan participation on a pro rata basis; additional collateral requirements are at the discretion of lender
  • Loan Origination
    • MSNLF – Must be a new loan originated after April 8, 2020
    • MSELF – Must be expansion of existing term loan originated before April 8, 2020
  • Maximum loan amounts
    • MSNLF – the maximum loan is $25 million, but after loan is made, borrower’s total debt (including committed but undrawn debt) may not exceed 4 x borrower’s 2019 EBITDA
    • MSELF – the maximum size of the expanded portion of the loan is the lesser of: (i) $150 million, or (ii) 30% of the borrower’s existing outstanding and committed, but undrawn bank debt, but in any event, after loan is made, borrower’s total debt (including committed but undrawn debt) may not exceed 6 x borrower’s 2019 EBITDA
  • Facility Fees
    • MSNLF – Lender to pay the FED SPV a “facility fee” of 100 bps of principal amount of loan participation purchased by SPV (may be passed on the Borrower)
    • MSELF – no facility fees