In the coming weeks, the Federal Reserve will launch its Main Street Lending Program (“MSLP”), which will make available up to $600 billion in financing for eligible small and mid-sized businesses.
The primary goal of the MSLP is to ensure credit flow to middle-market companies that were in good financial standing prior to the COVID-19 pandemic, but are now experiencing difficulties due to mandated closures, stay-in-place orders, and related hardships.
In order to be eligible for a MSLP loan, a business must meet the following requirements:
- Size and Revenue: (a) Fewer than 10,000 employees, or (b) less than $2.5 billion in 2019 annual revenues. This means that businesses with more than 10,000 employees are still eligible as long as they had less than $2.5 billion in 2019 annual revenues.
- Citizenship: The business must be organized in the United States, with significant operations in, and a majority of its employees based in, the United States.
- Need Based: Borrowers will be required to affirm that they need financing due to the exigent circumstances presented by the COVID-19 pandemic, and that they are solvent.
- Participation in Other Programs: To qualify for an MSLP loan, the company is prohibited from participating in the Primary Market Corporate Credit Facility, a program previously launched by the Federal Reserve in March. Notably, businesses that have received a Paycheck Protection Program loan are eligible for an MSLP loan.
There are two types of MSLP loans:
- Main Street New Loan Facility: New loans to businesses with a minimum principal amount of $1 million, with a maximum amount equal to the lesser of (a) $25 million, or (b) 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 EBITDA.
- Main Street Expanded Loan Facility: Extension of existing loan facilities up to an amount equal to the lesser of (a) $150 million, (b) 30% of the borrower’s existing outstanding and committed but undrawn bank debt, or (c) 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.
Companies may apply for a Main Street New Loan or a Main Street Expanded Loan, but not both. All MSLP loans will be originated by U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies. Nonbank lenders are ineligible to participate in the program. After a loan is funded, the Federal Reserve will acquire a 95% interest through a special purpose vehicle.
Main Street New Loans and Main Street Expanded Loans will be extended to borrowers on the following key terms:
- Maturity and Prepayment: Four years, with no prepayment penalty.
- Deferral: Principal and interest payments are deferred for one year.
- Interest Rate: Secured Overnight Financing Rate + 250-400 basis points.
- Collateral: Loans under the Main Street New Loan Facility are unsecured. For loans expanded under the Main Street Expanded Loan Facility, any collateral securing the loan, whether that collateral was pledged originally or at the time of upsizing, will secure the upsized tranche on a pro rata basis.
- No Forgiveness: Unlike Paycheck Protection Program loans, credit extended under the MSLP is not eligible for forgiveness.
- Use of Loan Proceeds: Borrowers must attest that they will undertake reasonable efforts to maintain payroll and retain employees during the loan term. In addition, MSLP loan proceeds cannot be used to repay or refinance existing loans.
- Restrictions on Business Activities: Loan recipients must refrain from repaying other debt of equal or lower priority, with the exception of mandatory principal payments, until the MSLP loan is paid in full. Moreover, borrowers must comply with the compensation, stock repurchase, and capital distribution restrictions set by Congress in the CARES Act. These restrictions expressly limit a company’s ability to repurchase stock, pay dividends, or increase executive compensation during the loan term.
The Federal Reserve has solicited comments from lenders, borrowers, and other stakeholders on the program’s terms and conditions, which will require further clarification before loans are made. The comment period closed April 16. Among other things, the Federal Reserve has yet to provide specific guidance with respect to how businesses will calculate employee and revenue thresholds, and in particular, whether the thresholds require borrowers to aggregate employee or revenue levels with affiliates. In addition, the Federal Reserve’s initial “Term Sheets” do not specify the methodology for calculating EBITDA. Banks are also urging changes that would reduce minimum loan sizes and provide greater flexibility on interest rates. We are tracking these and other developments, and will provide updates as additional information becomes available.
Metz Lewis Brodman Must O’Keefe LLC has assembled a team of professionals who are available to answer your questions regarding the MSLP. Whether you are concerned about eligibility, or are seeking guidance on the application process, our attorneys have decades of experience helping clients navigate through troubled financial times. For more information, or to speak with one of our professionals, please reach out to your primary Metz Lewis contact or:
- Brian Golias: 412-918-1156 | email@example.com
- Justin Tuskan: 412-918-1158 | firstname.lastname@example.org