The Main Street Lending Program: A financial resource in reserve

As COVID-19 cases rebound in various parts of the United States, questions arise about the strength of the economic recovery trajectory and the financial ability of businesses and nonprofits to survive and thrive. The Federal Reserve made the Main Street Lending Program (MSLP), a CARES Act-funded lending program operational for a wide range of businesses (less than 15,000 employees or $5 billion in 2019 revenue) and nonprofits (at least 10 employees along with other eligibility criteria noted below). Given this program is operational through Sept. 30, 2020 and hasn’t generated significant interest in eligible lenders or borrowers, it appears this program is in place as an economic backstop. Should the country experience a surge in cases and a return to selective economic lockdowns, the MSLP is in place and ready to be extended in time and provisions as a financial lending safety net. The MSLP will be particularly important should loan defaults run through current bank loan reserves.

Contingency planning

Depending on your financial situation, this program could be part of your contingency plan should you need to build near-term cash reserves, free up working capital, and restructure balance sheets. By doing so, companies can continue supporting production rampup and subtier suppliers, expand current product lines and customer bases, and take advantage of distressed merger and acquisition targets. Nonprofits may shore up cash balances drained from lost services, such as hospitals losing elective procedure activity, crowd-restricted admission fees and associated sales in museums and cancelled university athletic programs, and cancelled donor events. While not a grant program with forgivable principal like the Paycheck Protection Program, the MSLP may be attractive given its two-year deferral of principal with payments back-end loaded of 15% in years three and four and 70% in year five. Also, interest payments defer for one year.

Nonprofit facilities announced July 17, 2020

Nonprofits are now eligible to participate in the MSLP. The terms of the loans generally follow the same structure as the for-profit facilities, and the lenders are similarly responsible for approving loans using their underwriting application and approval process. There are specific eligibility criteria to meet, and full criteria for both facilities is found on the term sheets. Major items include:

• The organization has been in continuous operation since Jan. 1, 2015.
• The organization has at least 10 but not more than 15,000 employees, or had 2019 annual revenues of $5 billion or less.
• The endowment is less than $3 billion.
• Total nondonation revenues are equal to or greater than 60% of expenses for the period from 2017 through 2019.
• The organization has a ratio of adjusted 2019 earnings before interest, depreciation, and amortization (EBIDA) to unrestricted 2019 operating revenue, greater than or equal to 2%.
• The organization has a ratio (expressed as a number of days) of (i) liquid assets at the time of the origination of the upsized tranche to (ii) average daily expenses over the previous year, equal to or greater than 60 days.
• The organization doesn’t also participate in the NONLF, the MSNLF, the MSPLF, the MSELF, the Primary Market Corporate Credit Facility, or the Municipal Liquidity Facility.
• The organization hasn’t received specific support pursuant to the Coronavirus Economic Stabilization Act of 2020 (Subtitle A of Title IV of the CARES Act).

Available options

The Coronavirus Aid, Relief, and Economic Security (CARES) Act appropriated $75 billion for the Department of the Treasury to make an equity investment in a special-purpose vehicle to be administered by the Federal Reserve Bank of Boston. There are five lending facilities currently available for for-profit and nonprofit entities. The combined size of all the facilities will be up to $600 billion.

• Main Street New Loan Facility (MSNLF): A secured or unsecured term loan made by an eligible lender(s) to an eligible borrower originating after April 24, 2020. The loans cannot be subordinated in terms of priority to any of the eligible borrower’s other loans or debt. MSNLF Term Sheet
• Main Street Expanded Loan Facility (MSELF): A secured or unsecured term loan or revolving credit facility made by an eligible lender(s) to an eligible borrower that was originated on or before April 24, 2020, and that has a remaining maturity of at least 18 months (accounting for any adjustments made to the maturity of the loan after April 24, 2020, including at the time of upsizing), provided that the upsized tranche of the loan is a term loan. MSELF Term Sheet
• Main Street Priority Loan Facility (MSPLF): A secured or unsecured term loan made by an eligible lender(s) to an eligible borrower that was originated after April 24, 2020; the leverage allowed on these loans is higher than on the other two facilities. An MSPLF loan can be used to refinance existing loans owed to other lenders. MSPLF Term Sheet
• Nonprofit Organization New Loan Facility (NONFL): An eligible loan is a secured or unsecured term loan made by an eligible lender(s) to an eligible borrower that was originated after June 15, 2020, with the terms outlined below. NONFL Term Sheet
• Nonprofit Organization Expanded Loan Facility (NOELF): A secured or unsecured term loan or revolving credit facility that was originated on or before June 15, 2020, and that has a remaining maturity of at least 18 months (taking into account any adjustments made to the maturity of the loan after June 15, 2020, including at the time of upsizing), provided that the upsized tranche of the loan is a term loan that has all of the features below. NOELF Term Sheet

Basic terms

Companies and nonprofits investigating the MSLP will see these major terms:

• Maximum term: Five years for all facilities
• Minimum loan size: MSNLF, SMPLF, and NONFL $250,000; MSELF and NOELF $10 million
• Maximum loan size: (Lesser amount of leverage of total maximum debt to adjusted 2019 EBITDA calculation or cap) MSNLF 4 times or $35 million; MSPLF 6 times or $50 million; and MSELF 6 times or $300 million; NONFL lesser of $35 million or the average 2019 quarterly revenue; NOELF lesser of $300 million or the average 2019 quarterly revenue
• Principal deferral: Two years for all facilities
• Interest deferral: One year for all facilities
• Principal payment schedule: 15%, 15%, 70% in years three through five for all facilities
• Interest rate: LIBOR (1 or 3 month) + 300 basis points for all facilities
• Prepayment: Allowed without penalty for all facilities
• Risk retention by the lender: 5% for all facilities
• Fees: Origination and transaction fees may apply

Companies and nonprofits need to carefully review the certifications and covenants listed on each term sheet related to executive compensation, stock repurchase, and capital distribution restrictions stipulated by the CARES Act. One such certification involves the unavailability of credit. While the MSLP FAQ July 15, 2020 states that this doesn’t mean no credit from other sources is available, the borrower must certify it is unable to secure “adequate credit accommodations” because of the amount, price, or terms available from other sources.

Next steps

As eligible lenders will use their underwriting criteria for the loan application, the first place to start is with your current lender relationships and the listing of MSLP eligible lenders. The additional certifications and covenants mentioned above are required for the Federal Reserve to purchase the loan from the eligible borrower. Your Plante Moran relationship partner is ready to discuss the applicability of these loan programs and the strategies to deploy these funds and leverage your capital structure.