The Federal Reserve Board releases details on scope and eligibility for the Main Street Lending Program

The Federal Reserve’s Main Street Lending Program (MSLP) will support commercial credit by purchasing up to $600 billion of eligible loans. After announcing the program in March and broadly defining components under the CARES Act legislation, the Federal Reserve released details of the program on April 30, 2020.

Through an initial contribution of $75 billion from the U.S. Department of Treasury, the Federal Reserve will form a single, common special purpose vehicle (Main Street SPV) to participate in direct lending transactions. Through the use of additional leverage, the Fed targets up to $600 billion of credit available to businesses in need.

What is the Main Street Lending Program?

The Main Street Lending Program is available to businesses with fewer than 15,000 employees or revenue of less than $5 billion in 2019 revenue. These loans are not forgivable.

How will the program work?

Businesses seeking Main Street loans will apply through eligible U.S. federally insured depository institutions, U.S. branches or agencies of foreign banks, U.S. bank holding companies, U.S. savings and loan holding companies, U.S. intermediate holding companies of foreign banking organizations, or U.S. subsidiaries of these entities. Nonbank financial institutions aren’t eligible. Eligible banks may originate new Main Street loans or use Main Street funding to increase the size of existing loans they have with businesses.

Through the Main Street New Loan Facility (MSNLF), the Main Street Primary Loan Facility (MSPLF), and the Main Street Expanded Loan Facility (MSELF), the Main Street SPV will purchase between an 85% and 95% participation in either new, unsecured term loans from $500,000 up to $25 million through the MSNLF or MSPLF and allow lenders to upsize existing facilities through the MSELF in tranches from $10 to $200 million.

Who is eligible to participate in the program?

Businesses with up to 15,000 employees or up to $5 billion in 2019 annual revenues may participate. The Fed released FAQ clarified that affiliation rules under the PPP apply to the MSLP size requirements. Eligible businesses need to have been created and organized under U.S. law before March 13, 2020 and must:

• Be domiciled in the United States, with significant U.S. operations.
• Have a majority of their employees based in the United States.
• Be eligible businesses as modified and clarified by the SBA for purposes of the PPP.
• Participate in only one of the Main Street facilities and not the Primary Market Corporate Credit Facility (PMCCF).
• Have been in sound financial condition prior to the onset of the COVID-19 pandemic.

Businesses that receive loans under the PPP are eligible for the Main Street Lending Program. While nonprofit organizations aren’t eligible for this program, the Federal Reserve and Treasury Department will be evaluating the feasibility of adjusting the borrow eligibility criteria for such organizations.

What are the terms of the loans?

The loans will have a four-year maturity with the first year’s principal and interest payments deferred. The adjustable rate interest will accrue at the LIBOR (one or three months) plus 300 basis points, and loans will incur a transaction fee of 100 basis points (75 basis points for the MSELF).

New Main Street loans originated under the MSNLF and MSPLF will be from $500,000 up to the lesser of $25 million, or the amount, that when added to the business’s existing outstanding and committed but undrawn debt, is less than four times the borrower’s 2019 EBITDA for MSNLF and six times the borrower’s 2019 for MSPLF.

Main Street upsize tranche loans extended under the MSELF to existing loans (loans must have been originated before April 8, 2020) will be at least $10 million up to the lesser of $200 million; 35% of the borrower’s existing bank debt; or the amount, when added with existing outstanding and committed but undrawn debt, is less than six times the borrower’s 2019 EBITDA. Existing loans secured by collateral or collateral pledged as part of the upsize will secure the Main Street loan on a pro rata basis.

What restrictions and certifications need to be made?

Eligible borrowers will be required to certify that they will “ ... make commercially reasonable efforts to maintain its payroll and retain its employees during the time the Eligible Loan is outstanding”. Additional certifications include:

• Borrowers will refrain from repaying the principal balance of, or paying any interest on, any debt until the eligible loan is repaid in full, unless the debt or interest payment is mandatory and due.
• Borrowers will not seek to cancel or reduce any of its committed lines of credit with the eligible lender or any other lender.
• A reasonable basis to believe that, as of the date of origination of the eligible loan and after giving effect to such loan, borrower has the ability to meet its financial obligations for at least the next 90 days and doesn’t expect to file for bankruptcy during that time period.
• Borrowers will follow compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under Section 4003(c)(3)(A)(ii) of the CARES Act, except that an S corporation or other tax pass-through entity that is an eligible borrower may make distributions to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings.
• Borrowers are eligible to participate in the facility, including in light of the conflicts of interest prohibition in Section 4019(b) of the CARES Act. 

Borrowers must also follow compensation, stock repurchase, and dividend restrictions that apply to direct loan programs under Section 4003(c)(3)(A)(ii) of the CARES Act.

• Borrowers are required to suspend dividends and stock buybacks while the loan is outstanding.
• Borrowers are required to limit employee and officer compensation in excess of $425,000 to their calendar year 2019 compensation. Employees or officers with compensation over $3 million in 2019 are limited to $3 million, plus 50% of the amount in excess of $3 million.

What additional guidance is needed?

• The definitions for EBITDA and indebtedness have raised initial questions from businesses looking for a capital lifeline. EBITDA is broadly defined as earnings before, interest, taxes, depreciation, and amortization. That said, businesses typically use the term adjusted EBITDA in the context of M&A transactions and loan agreements. Adjusted EBITDA can be defined in myriad ways and current guidance states that lenders may use either the adjusted EBITDA methodology in place for existing borrowers or the methodology used in originating loans “to similarly situated borrowers.” Businesses will need additional clarity about how adjusted EBITDA is calculated for purposes of loan size and leverage calculations.
• The provisions highlighted in Section 4003(c) of the CARES Act related to the prohibition on distributions, equity repurchase, owner compensation, and use of proceeds have yet to be addressed as investors look to understand the full impact of this program, which could extend beyond the term of loan maturity. The CARES Act does provide the Treasury Secretary with the ability to use discretion in the application, but the details of the restrictions and the Secretary’s authority remain unclear.
• Borrowers are required to submit a good-faith certification that their businesses “require financing due to the exigent circumstances presented by the coronavirus disease 2019 (COVID-19) pandemic, and that, using the proceeds of the Eligible Loan, they will make reasonable efforts to maintain payroll and retain employees during the term of the Eligible Loan.” We await more guidance on how borrowers should identify ‘exigent circumstances’ and demonstrate ‘reasonable efforts to maintain payroll.’
• Additionally, the program requires a review of potential conflicts of interest as defined in Section 4019(b) of the CARES Act intended to prohibit any business that is directly or indirectly owned by the president, senior executive branch officials, or members of congress — or certain of their immediate family members — from receiving any relief funds. This will require companies to review their ownership structure and consult with counsel on the definitions of covered entity and covered individual.
• While the SBA lenders of the PPP program were able to rely on borrowers’ good-faith certification in determining eligibility and the maximum loan amount, the level of due diligence on creditworthiness is expected to be more stringent for this program. We await guidance from participating Main Street lenders on the level of due diligence and underwriting that will be required.