April 30, 2020

Widening Main Street: Fed Opens the Main Street Lending Program to More Businesses

8 min

Three weeks after first providing term sheets for the Main Street Lending Program (MSLP), the Board of Governors of the Federal Reserve System (Board) has now announced several changes intended to expand the program's scope and eligibility coverage.

The MSLP is a program, funded in part by the CARES Act, to support lending to small and mid-sized businesses affected by the COVID-19 pandemic. The changes expand eligibility for participation by increasing the thresholds to be considered a small or mid-sized business, lowering the minimum loan amount, providing a potentially lower interest rate, and implementing a third facility designed for organizations that already have significant leverage. The Board, however, did not change the requirement that borrowers comply with certain restrictions on compensation, stock repurchases, and distributions under the CARES Act.

The Frequently Asked Questions (FAQs) issued by the Board provide further guidance to borrowers and lenders, including answers to previously unaddressed issues, such as how to count employees and what constitutes "commercially reasonable efforts" to maintain payroll. The FAQs confirm that companies receiving Paycheck Protection Program (PPP) loans through the Small Business Administration (SBA) are also eligible for MSLP loans. However, while nonprofit organizations are eligible for PPP loans, the FAQs confirm that nonprofit organizations are not eligible for MSLP loans. The Board "is evaluating a separate approach to meet their unique needs."

The MSLP is not yet operational, but the start date "will be announced soon." This article identifies key changes to the MSLP and highlights certain clarifications in the FAQs.

Key Changes to the Main Street Lending Program

(compared with the terms announced April 9, 2020)
  • Raises the thresholds for eligible borrowers:
    • Up to 15,000 employees (instead of 10,000) -or- 
    • Up to $5 billion in annual revenue (instead of $2.5 billion)
    • Only required to meet one threshold (i.e., employees or annual revenue)
  • Establishes three loan facilities (instead of two):
    • "New Loans" for new loans to borrowers with lower leverage
    • "Priority Loans" for new loans to borrowers with higher leverage
    • "Expanded Loans" for upsizing existing loans to borrowers with higher leverage
  • Creates two different risk retention amounts for lenders:
    • Lenders retain 5% of the risk for New and Expanded Loans
    • Lenders retain 15% of the risk for Priority Loans
  • Reduces the minimum and increases the maximum loan sizes:
    • $500,000 minimum for New and Priority Loans (instead of $1 million)
    • $10 million minimum for Expanded Loans (instead of $1 million)
    • $200 million maximum for Expanded Loans (instead of $150 million)
  • Loan terms:
    • Interest rate is LIBOR + 3.00% (instead of SOFR + 2.50% to 4.00%) 
Program Facilities

Based on the new term sheets, the MSLP creates a single common special purpose vehicle (SPV) for three parallel loan facilities: the Main Street New Loan Facility (New Loan Facility), the Main Street Priority Loan Facility (Priority Loan Facility), and the Main Street Expanded Loan Facility (Expanded Loan Facility, and together, the Facilities). The SPV will purchase 95% or 85% participations (depending on the Facility) in eligible loans issued by eligible lenders to eligible borrowers.

The Federal Reserve Bank of Boston 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.

The Priority Loan Facility

The Priority Loan Facility, like the New Loan Facility, is for borrowers who do not have an existing loan with the MSLP lender. However, the maximum loan size for the Priority Loan facility is the lesser of $25 million or 6 times the borrower's EBITDA, as opposed to only 4 times EBITDA for the New Loan Facility. This new Facility, therefore, allows businesses that may already have significant debt to borrower under the MSLP. However, because these loans would have greater risk than those under the New Loan Facility, the SPV will purchase only 85% participations in the loans under the Priority Loan Facility (with the lender retaining 15% of the risk).

Eligible Borrowers

The general eligibility requirements for borrowers are the same for all MSLP Facilities. The loans are available to a business that:

  • Was established prior to March 13, 2020;
  • Is not an ineligible business based on certain SBA regulations*;
  • Has 15,000 employees or fewer or had 2019 annual revenues of $5 billion or less;
  • Is a U.S. company with significant operations in and a majority of its employees in the U.S.;
  • Participates in only one of the Facilities (and also not in the Board's Primary Market Corporate Credit Facility); and
  • Has not received specific support pursuant to Subtitle A of Title IV of the CARES Act (i.e., not an air carrier or a business critical to maintaining national security).

*The MSLP incorporates certain SBA regulations, as modified by the CARES Act, rendering some businesses ineligible, including: financial businesses primarily engaged in the business of lending, passive businesses owned by developers and landlords, life insurance companies, companies located in a foreign country, businesses primarily engaged in lobbying or political activities, government-owned entities, and businesses which have previously defaulted on a federal loan.

Eligible Lenders

The banking organizations listed below are eligible lenders under the MSLP (which notably excludes nonbank financial institutions that are not part of a banking organization):

  • U.S. federally insured banks, savings associations, and credit unions
  • U.S. branches or agencies of foreign banks
  • U.S. bank holding companies and savings and loan holding companies
  • U.S. intermediate holding companies of foreign banking organizations
  • Any U.S. subsidiary of any of the foregoing
Loan Terms

A loan eligible to be purchased by the SPV under the Facilities has the following characteristics:

  • Originated after April 24, 2020
    (if upsizing, the existing loan must have been originated before April 24, 2020)
  • Secured or unsecured
  • 4-year maturity
  • Adjustable rate at LIBOR + 3.00%
  • Principal and interest payments deferred for 1 year
  • No prepayment penalty
  • Minimum loan size:
    • New Loan: $500,000
    • Priority Loan: $500,000
    • Expanded Loan: $10 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)
    • Priority Loan: Lesser of (a) $25 million or (b) the amount that would put the borrower's total outstanding and committed but undrawn debt at 6 times its 2019 earnings (measured as EBITDA)
    • Expanded Loan: Lesser of (a) $200 million, (b) 35% 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)
Borrower Certifications and Covenants

A borrower seeking an eligible loan under the MSLP will be required to make several certifications and covenants, including the following:

  • Certify that it has a reasonable basis to believe that, as of loan origination and after giving effect to such loan, it has the ability to meet its financial obligations for at least the next 90 days;
  • Commit to refrain from using the proceeds to repay other loan balances and refrain from repaying other debt, unless the debt or interest payment is mandatory and due;
  • Commit to refrain from seeking to cancel or reduce any of its committed lines of credit with the MSLP lender or any other lender;
  • Commit to follow the compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under CARES Act 4003(c)(3)(A)(ii); and
  • Certify that there are no conflicts of interest as described under CARES Act 4019(b).
Requirement to Make Efforts to Retain Employees

The Facilities term sheets state that a borrower "should make commercially reasonable efforts to maintain its payroll and retain its employees" while the MSLP loan is outstanding. The Board has now clarified this to mean that a borrower "should undertake good-faith efforts to maintain payroll and retain employees, in light of its capacities, the economic environment, its available resources, and the business need for labor."

This clarification does not change our previous advice that borrowers should document the facts and circumstances of any reduction to head count or compensation to demonstrate that the decisions are made in good faith. The Board also confirmed that businesses that previously laid off or furloughed workers are still eligible for MSLP loans.

References to SBA Provisions for Employees, Revenue, and Affiliates

The FAQs explain that the MSLP will use the SBA's definitions or regulations with respect to counting employees, determining revenue, and identifying affiliates.

  • Employees. A borrower should follow the SBA framework (13 CFR 121.106) to determine its number of employees for eligibility purposes. The business should count all its own and its affiliates' full-time, part-time, seasonal, or otherwise employed persons, excluding volunteers and independent contractors. The businesses should use the average of the total number of persons employed for each pay period over the 12 months prior to the origination of the MSLP loan.
  • Revenue. A borrower may use either of the following methods to calculate its 2019 annual revenue, which must be aggregated with the revenue of any affiliates:
    1. Revenue per its 2019 Generally Accepted Accounting Principles-based (GAAP) audited financial statements; or
    2. Annual receipts for the fiscal year 2019, as reported to the Internal Revenue Service, as the term "receipts" is used by the SBA in 13 CFR 121.104(a).
  • Affiliates. A borrower's affiliates are determined in accordance with the SBA's affiliation test set forth in the January 1, 2019, version of 13 CFR 121.301(f).
Amortization and Capitalization

Loans made under all three Facilities will have no principal or interest payments during the first 12 months, but unpaid interest will be capitalized. The loan will then be amortized over the remaining 3 years of the term. The amortized principal will be due at the end of each year according to the following schedule:

  • New Loans:
    • End of year 2: 33.3% due
    • End of year 3: 33.3% due
    • End of year 4: 33.3% due
  • Priority and Expanded Loans:
    • End of year 2: 15.0% due
    • End of year 3: 15.0% due
    • End of year 4: 70.0% (balloon) due