On Thursday morning, the Board of Governors of the Federal Reserve System (Board) released the highly anticipated details of its massive $600 billion Main Street Lending program (Program) to support small and mid-sized businesses with up to 10,000 employees. The Program is particularly welcomed by businesses that are too large to be eligible for loans under for the Paycheck Protection Program (PPP).
The Program establishes two parallel facilities: the Main Street New Loan Facility (New Loan Facility) and the Main Street Expanded Loan Facility (Expanded Loan Facility). The Program is not yet operational, and the Board and Treasury are accepting public comments on the Program until April 16.
The Program parameters, as provided in the New Loan Facility and Expanded Loan Facility (Facilities) term sheets, are summarized below.
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Background
Before the CARES Act even passed, the Board announced that it would establish a Main Street Lending program to "support lending to eligible small and medium-sized businesses, complementing efforts by the SBA." Then in Title IV of the CARES Act, Congress directed the Treasury to work with the Board to develop a program to assist mid-sized companies, those with between 500 and 10,000 employees.
The final form of the Program combines those two concepts to cover both small and mid-sized businesses. An eligible borrower can be any business with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues, provided it is organized in the U.S. with a majority of its employees based in the U.S.
Program Facilities
The Program creates a single common special purpose vehicle (SPV) for the two Facilities. That SPV will purchase 95% participations in eligible loans issued by U.S. banks (including savings associations and applicable U.S. holding companies) to eligible borrowers, with the lender retaining the remaining 5%. A to-be-named Federal Reserve Bank will fund the SPV, along with a $75 billion investment from the Treasury under its CARES Act authority. With a combined size of up to $600 billion, the Facilities will enable over $630 billion in lending to small and mid-sized businesses.
Loans under the New Loan Facility are intended for companies that do not have existing loans, while the Expanded Loan Facility can be used by lenders that are "upsizing" existing credit. The loan characteristics for eligible loans under the Expanded Loan Facility apply only to the expanded portion of the loan (and the SPV will purchase 95% of that portion). The Expand Loan Facility is targeted at the larger end of the range of eligible companies.
Loan Terms and Relation to Other Board Facilities
An eligible loan under the Facilities has the following characteristics:
- Originated on or after April 8, 2020
(if upsizing, the existing loan must have been originated before April 8, 2020) - 4-year unsecured term loan
- Adjustable rate at SOFR* + 2.50% to 4.00%
- Amortization of principal and interest deferred for 1 year
- No prepayment penalty
- Minimum loan size of $1 million
- Maximum loan size:
- New Loan: Lesser of (a) $25 million or (b) the amount that would put the borrower's total outstanding and committed but undrawn debt at 4 times its 2019 earnings (measured as EBITDA)
- Expanded Loan: Lesser of (a) $150 million, (b) 30% of the borrower's existing outstanding and committed but undrawn bank debt, or (c) the amount that would put the borrower's total outstanding and committed undrawn debt at 6 times its 2019 earnings (measured as EBITDA)
* SOFR is the Secured Overnight Financing Rate, and it is intended to replace the U.S. dollar London Interbank Rate (US LIBOR) in future financial contracts. The rate is published daily, and as of April 9, 2020, the rate is 0.01%.
The Board has announced numerous facilities in which the Treasury can invest funds under its CARES Act authority. One such facility (also announced, but not yet operational), the Primary Market Corporate Credit Facility (PMCCF), will be available to any U.S. company. The Board has clarified that a borrower can use only one of the PMCCF, New Loan Facility, and Expanded Loan Facility.
Importantly, the Program is available to businesses that receive PPP loans from the Small Business Administration under Title I of the CARES Act. Allowing businesses to receive both a PPP loan and Main Street loan recognizes that PPP was targeted at employees, while the Main Street program is designed to meet the working capital and liquidity needs of businesses effected by COVID-19.
Borrower Requirements and Restrictions
A borrower seeking an eligible loan under the Program will be required to make several certifications and attestations, including the following:
- Attest that it requires financing because of the COVID-19 pandemic;
- Attest that it will make reasonable efforts to maintain its payroll and retain its employees during the term of the Eligible Loan;
- Attest that it will follow compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under CARES Act 4003(c)(3)(A)(ii);
- Attest that it will refrain from using the proceeds to repay other loan balances and refrain from repaying other debt of equal or lower priority (except mandatory principal payments); and
- Certify that there are no conflicts of interest as described under CARES Act 4019.
What is more interesting than these restrictions are the potential restrictions that are not applicable to loans under the Program. The CARES Act, in section 4003(c)(3)(D)(i), sets a list of restrictions that would be applicable to any Treasury-funded program that provides direct loans. Because the Facilities purchase participations in loans made by banks, those restrictions—which include restrictions on outsourcing, offshoring, and conduct related to labor unions and collective bargaining—do not apply to the Program.
Also, the requirement to make "reasonable efforts to retain employees" is quite different from the "retain at least 90 percent" requirement for programs that make direct loans. Unfortunately, the Board provides no guidance regarding what constitutes "reasonable efforts." Borrowers should expect to document the facts and circumstances of any cuts to head count or compensation to ensure the decisions are economically defensible.
Issues and Considerations
For Borrowers
Small and mid-sized businesses that are interested in the Program should start by assessing their current outstanding debit and 2019 earnings. These factors will determine how large the potential loan could be. Businesses with less than $250,000 in annual earnings (even with zero existing debt) are not eligible for a loan, because 4 times EBITDA would be less than the Program minimum.
Borrowers should reach out to their existing commercial banking partners. As we saw with the PPP, there will be a rush to be first in line. A business with an existing loan that is struggling to maintain operations may find its bank to be interested in lending under the Expanded Loan Facility. Although the exact application process has not yet been determined, businesses can start gathering the documentation now in anticipation of what will be required, such as 2019 financial statements.
Businesses of all sizes should also consider the favorable terms for Program loans. Even if the minimum loan amount of $1 million is more than a business needs at the moment, the potential for ongoing and longer-term disruption from COVID-19 may make the loans attractive as a stable source of liquidity.
For Banks
Banks will have to consider the risks associated with lending under the Program. Although holding only 5% of a loan limits a bank's potential losses, eligible loans are being made to businesses that are known to be impacted by COVID-19. Furthermore, banks will need to better understand the mechanics and timing for selling the participations to the SPV, once those details are released.
With interest rates at only SOFR plus 2.5% to 4.0%, banks will need to consider the potential income from Program loans in relation to their cost of funds. There is, however, an additional potential upside from the origination and servicing fees on the loans. Banks will receive a one-time origination fee of 1.0% from borrowers and an annual 0.25% of principal servicing fee from the Program's SPV.
Unlike other COVID-19 relief programs, such as the PPP, this Program appears to rely on more traditional funding processes. This should allow banks to ramp up loan production more quickly and should create fewer funding bottlenecks.
Conclusion
This program is a lifeline to small and mid-sized businesses that are in need of funding to survive the impact of COVID-19. Although there are some restrictions associated with these loans, the Program's lower "reasonable effort" standard for maintaining employment is likely more manageable for companies that have already been forced to reduce staff or fully shut down operations.
While we have been working with many clients to procure PPP loans, we anticipate many more will be interested in this Main Street Lending program. Because it provides funding through more traditional processes, businesses may find it easier to get the financial assistance they need. We will be closely monitoring for when the Program goes live, but in the meantime, small and mid-sized businesses should contact any of the listed authors to learn more about their options under these and other COVID-19 business relief programs.