Main Street Lending Program – The Next Gold Rush?

Under Title IV of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), Congress authorized the Main Street Lending Program (the “MSLP” or “Program”) but provided little, if any, additional information about what the Program would be or look like.  On April 9, 2020, the U.S. Treasury Department (“Treasury”) and the Board of Governors of the Federal Reserve (“Federal Reserve”) issued guidance and established the new $600 billion Program, aimed to ensure credit flows to small and mid-sized businesses that were in good standing before the COVID-19 pandemic.    The Treasury and the Federal Reserve are clearly still finalizing the Program as they accepted comments on it through April 16, 2020.   We expect more guidance based on those comments, among other things, but we offer a few insights in this installment to help get you oriented and familiarized with the Program.

1. Who makes new loans under the MSLP?

The Treasury will provide $75 billion in equity to a single special purpose vehicle (the “SPV”) operated by the Federal Reserve.  Banks that qualify as “Eligible Lenders” will make loans to successful applicants.  The SPV will then “participate” in 95% of such loans by delivering to each Eligible Lender cash equal to 95% of the amount of such loans.  “Eligible Lenders” for purposes of the Program are U.S.-insured depository institutions, U.S. bank holding companies and U.S. savings and loan holding companies.

2. What are the eligibility requirements for borrowers?

An “eligible borrower” under the MSLP must meet all the following criteria:

• It must be a business;
• It has 10,000 employees or less or its 2019 annual revenues are less than or equal to $2.5 billion;
• It must be created or organized in the U.S. (or under the laws of the U.S.) with significant operations in and a majority of its employees based in the U.S.;
• It must have been “in good financial standing” before the COVID-19 pandemic; and
• It is not participating in the Primary Market Corporate Credit Facility.

3. When will the loans become available?

The Federal Reserve has not specified a start date for the MSLP, but it did announce program details on April 9, 2020 and we expect additional guidance by the end of this month if not sooner.  The Program is scheduled to end on September 30, 2020.

4. What loan facilities are available under the Program?

The program includes two loan facilities and has issued term sheet for each of them: (i) the Main Street New Loan Facility (the “New Loan Facility”), which makes new loans to businesses; and (ii) the Main Street Expanded Loan Facility (the “Expansion Facility”), which increases existing loan facilities to businesses.  A borrower may only obtain a loan under one facility.

5. What are the terms?

New Loan Facility Loans:

• four-year maturity;
• amortization of principal and interest deferred for one year;
• adjustable rate of SOFR (Secured Overnight Financing Rate) plus 250-400 basis points (2.5% to 4%);
• minimum loan size of $1 million;
• maximum loan size of 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 four times the borrower’s 2019 earnings before interest, taxes, depreciation and amortization (“EBITDA”); and
• prepayment is permitted without penalty.

Expansion Facility Loans:

• Same as New Loan Facility except:

• the existing facility must have been made by an eligible lender to an eligible borrower on or before April 8, 2020;
• any collateral securing the existing eligible term loan, whether pledged under the original terms of the eligible term loan or at the time of upsize, will secure the Expansion Facility Loan’s upsized tranche on a pro rata basis; and
• the maximum loan size is the least of (1) $150 million, (2) 30% of the borrower’s existing outstanding and committed but undrawn bank debt, or (3) an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed six times the borrower’s 2019 EBITDA.

For both, the leverage test uses simply EBITDA rather than adjusted EBITDA, and does not appear to include adjustments or “addbacks” that are often included in leveraged credit facilities. The leverage calculation includes undrawn commitments as debt, and does not appear to have a cash netting feature. For existing loans under the Expansion Facility, borrowers that use adjusted EBITDA may need to recalculate EBITDA without any addbacks to determine the cap on maximum loan size.

6. Are there any borrower fees?

Yes, the amount of the fees depends in part on the facility under which a Program loan is made:

• New Loan Facility loan: A borrower must pay its lender (a) an origination fee equal to 100 basis points (1%) of the principal amount of such a loan and (b) if passed through to the borrower by lender, a facility fee of 100 basis points (1%) of the principal amount of the loan participation the SPV purchases (which should be ninety-five percent of the loan’s principal amount).
• Expansion Facility loan: A borrower must pay its lender a fee equal to 100 basis points (1%) of the principal amount of such a loan.

7. What are the loan’s restrictions?

• Borrower will be prohibited from engaging in stock buybacks of nationally listed shares of the borrower or any of its parent entities, unless contractually obligated prior to enactment of the CARES Act, or from paying dividends or making other capital distributions with respect to common stock, until one year after the loan is no longer outstanding.
• Borrower also will be prohibited from increasing the compensation of any employee whose compensation exceeded $425,000 in 2019 or from offering the employee significant severance or termination benefits until one year after the loan is no longer outstanding.
• Borrower’s officers and employees whose total compensation exceeded $3 million in 2019 cannot receive compensation greater than $3 million, plus 50% of the amount over $3 million that the individual received in 2019 until one year after the loan is no longer outstanding.

It is unclear how these compensation provisions will apply to newly hired employees who had no 2019 compensation from the applicable borrower.  Additionally, prospective borrowers should review their employment agreements to confirm that they can comply with these restrictions without breaching those agreements and may need to seek waivers under, or amendments of, such agreements.

Generally, the Program will be subject to applicable requirements under the Federal Reserve Act, including policies and procedures regarding taxpayer protection and borrower solvency and these are reflected in the restrictions above as well as the attestations below.

8. What attestations and other requirements are there?

A borrower must attest, that it is eligible to borrow and that it will abide by the restrictions, that it requires financing due to the COVID-19 pandemic, and that it will use reasonable efforts to apply the proceeds of the loan to maintain its payroll and retain its employees during the term of the loan, which is 4 years. There is no specific guidance on what it means to “require financing” or what constitutes “reasonable efforts” to retain the workforce.  However, as to the need for the MSLP loan, the calculation of the leverage test referred to below includes undrawn commitments, which implies that access to additional financing sources alone would not preclude an applicant from making the attestation.  With regard to the “reasonable efforts”, given the general phrasing of this attestation, the 4 year loan term (a lot can happen to a business during that term) and the restrictions on other uses in the following paragraph, borrowers should, in absence of future guidance on the matter, view it as an anti-abuse prevention and act accordingly.

A borrower cannot use the proceeds of a MSLP loan to repay other loan balances, cannot repay other debt of equal or lower priority, except for mandatory principal payments, and cannot pay dividends or make other capital distributions with respect to its common stock (expected to be expanded to all equity interests), each until its MSLP loan has been repaid in full.  These aspects were widely commented on during the comment period as being unmanageable and impractical and excluding otherwise eligible (and impacted) borrowers, and in desperate need of clarification and guidance.

9. Is more guidance forthcoming?

The Treasury and the Federal Reserve accepted comments during the week after their April 9^th establishment of the Program through April 16, 2020 and is required to at least consider such comments.  At FisherBroyles, we are closely monitoring this situation and as we said earlier, we expect to see additional guidance before the end of April.

 

For additional information, please contact any of the following: Paul Economon, Partner [email protected] or Kevin Gluntz, Partner [email protected], with any questions or more specific situations.  Appreciation and credits are made to our paralegal, Adam Gluntz, for his help with this Alert.

 

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