Treasury and Fed Announce Details of $600 Billion Main Street Business Lending Program for Small and Mid-Sized Businesses

April 10, 2020
Firm Publication

Please note that the content below was posted on April 10, 2020. We have since provided updated guidance on the topics discussed in this post here.

The U.S. Treasury Department (Treasury) and Federal Reserve have released much-anticipated details regarding the establishment of a Main Street Business Lending Program (Main Street Program) to provide up to $600 billion in new financing for businesses with up to 10,000 employees or $2.5 billion in 2019 annual revenues. Unlike loans available to qualifying small businesses under the SBA Paycheck Protection Program (PPP), loans made under the Main Street Program will not be forgivable, but for borrowers that qualify (likely including many private equity portfolio companies that may have been precluded from obtaining PPP loans due to the SBA’s affiliation rules), the Main Street Program could provide attractive terms and significant borrowing capacity.

Structure of the Main Street Program

The Main Street Program will consist of a single special purpose vehicle (SPV) that will administer two separate facilities: the Main Street New Loan Facility (New Loan Facility) and the Main Street Expanded Loan Facility (Expanded Loan Facility). The Expanded Loan Facility provides for the upsizing of existing credit facilities (i.e., those originated prior to April 8, 2020) by up to $150 million. The New Loan Facility provides for new term loans of up to $25 million.

The SPV will be partially funded with a $75 billion equity investment by the Treasury pursuant to Title IV of the CARES Act, with up to $525 billion being funded by an as-yet unspecified Federal Reserve Bank. The SPV will purchase 95% participations in eligible loans, which will be underwritten by U.S. insured depository institutions, bank holding companies, and savings and loan holding companies.

A borrower will only be permitted to participate in one of the New Loan Facility, Expanded Loan Facility, and Primary Market Corporate Credit Facility (another facility established by the Treasury and Federal Reserve to purchase eligible corporate debt). However, a borrower may participate in both the Main Street Program and the PPP.

The Treasury and Federal Reserve are accepting public comments on the proposed structure and terms of the Main Street Program until April 16. The SPV will stop purchasing participation in new loans on September 30, 2020, unless the Treasury and Federal Reserve extend the Main Street Program.

Overview of the Main Street Program Loan Eligibility and Terms

Who is eligible to participate in the Main Street Program?

Any business with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues is eligible, provided that such business (1) is created or organized in the United States or under the laws of the United States and (2) has significant operations in and a majority of its employees based in the United States.

However, pursuant to section 4019(b) of the CARES Act, an entity will not be eligible to participate in the Main Street Program if the President, the Vice President, the head of an Executive Department or a Member of Congress (or their spouse, child, daughter-in-law or son-in-law) has a “controlling interest” (defined as direct or indirect control of 20%+ by vote or value of any class of equity) of such entity.

What is an eligible loan under the New Loan Facility?

Eligible new loans will have the following terms/characteristics:

  • Originated on or after April 8, 2020.
  • Maturity: four-year term loan.
  • Amortization of principal and interest deferred for one year.
  • No prepayment penalty.
  • Interest rate (adjustable): SOFR + 250-400 bps.
  • Unsecured.
  • Minimum loan amount: $1 million.
  • Maximum loan amount: lesser of (a) $25 million or (b) the amount that would bring the borrower’s total outstanding debt (including any availability under committed but undrawn facilities) to an amount equal to four times its 2019 EBITDA.
What is an eligible loan under the Expanded Loan Facility?

Eligible upsize loans will have the following terms/characteristics:

  • Upsize to a term loan originated before April 8, 2020.
  • Maturity: four-year term loan.
  • Amortization of principal and interest deferred for one year.
  • No prepayment penalty.
  • Interest rate (adjustable): SOFR + 250-400 bps.
  • May be secured (by collateral that was pledged for the original loan or otherwise) or unsecured.
  • Minimum loan amount: $1 million.
  • Maximum loan amount: lesser of (a) $150 million, (b) 30% of the borrower’s existing outstanding bank debt (including any availability under committed but undrawn facilities), or (c) the amount that would bring the borrower’s total outstanding debt (including any availability under committed but undrawn facilities) to an amount equal to six times its 2019 EBITDA.
What restrictions will be imposed on a borrower under the Main Street Program?

The borrower will be required to attest as to all of the following:

  • 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) until the Main Street Program loan has been repaid in full.
  • That it will not seek to cancel or reduce any of its outstanding lines of credit with the lender(s) participating in the Main Street Program loan or any other lender. (In addition, the lender(s) participating in the Main Street Program loan must also attest that it will not cancel or reduce any existing lines of credit outstanding to the borrower.)
  • That it requires financing due to the exigent circumstances presented by the COVID-19 pandemic.
  • That it will make reasonable efforts to maintain its payroll and retain its employees during the term of the loan.
  • That it meets the applicable EBITDA leverage condition referenced in the formula for calculating the maximum loan amount.
  • That it will do all of the following:
    • Until the date 12 months after the date on which the loan is no longer outstanding, not repurchase any of its equity securities (or any equity security of any parent entity) that is listed on a national securities exchange, except to the extent required under a contractual obligation that was in effect as of March 27, 2020.
    • Until the date 12 months after the date on which the loan is no longer outstanding, not pay dividends or make other capital distributions with respect to its common stock.
    • Comply with the limitations on compensation (for employees whose total compensation exceeded $425,000 in calendar year 2019) set forth in section 4004 of the CARES Act.

On the basis of current information provided by the Federal Reserve, it appears that certain of the restrictions listed in section 4003(c)(3)(D)(i) of the CARES Act – including restrictions on outsourcing, offshoring, and conduct related to labor unions and collective bargaining – will not apply to the Main Street Program. The Federal Reserve is apparently relying upon its authority under Section 13(3) of the Federal Reserve Act and under Section 4003(c)(3)(D)(ii) of the CARES Act to set the “terms and conditions” of various loan programs to select the restrictions applicable to the Main Street Program.

What fees are associated with loans under the Main Street Program?
  • For all loans:
    • The borrower will pay the lender an origination/upsize fee of 100 bps of the principal amount of the new loan or upsize, as applicable.
    • The SPV will pay the lender a servicing fee of 25 bps of the principal amount of its participation per annum.
  • For new loans only:
    • The lender will pay the SPV a facility fee of 100 bps of the principal amount of the loan participation purchased by the SPV (fee may be passed through to borrower).

Takeaways for Borrowers

The Main Street Program should help many otherwise creditworthy borrowers facing working capital or liquidity challenges due to the COVID-19 pandemic access additional debt financing on relatively favorable terms.

Borrowers should note that accepting Main Street Program loans may significantly restrict their ability to return capital to equity holders. Each borrower will be restricted from paying dividends or make other capital distributions with respect to its common stock until the date 12 months after the date on which its Main Street Program loan is no longer outstanding, and unlike the restriction on stock buy-backs, this dividend restriction is not limited to publicly traded securities.

Borrowers with existing bank term loans may be best positioned to take advantage of the opportunity provided by this program, as upsizing an existing bank loan may be more appealing to both borrowers and lenders than entering into a new credit facility for a number of reasons, including:

  • With the high volume of loan applications banks are seeing, banks may prefer to prioritize existing customers that have been previously underwritten, especially existing loan customers who are facing some level of short-term financial distress.
  • Upsizing an existing loan may involve substantially less administrative burden (e.g., know-your-customer requirements, diligence, documentation).
  • Upsizing an existing loan may allow borrowers and lenders to avoid having to address intercreditor issues arising from the Main Street Program’s restrictions on repaying other debt.
  • New loans require the payment of a 100 bps facility fee to the SPV that is not required in an upsize scenario.
  • Given that new loans will be unsecured, lenders could charge a higher interest rate for these loans than for upsizing an existing loan that will be collateralized.

On the other hand, for a borrower that only desires a loan of up to $25 million and is able to meet the lower four times leverage test, a new unsecured loan may be attractive, particularly if the borrower does not have other existing credit arrangements that may restrict its ability to incur additional indebtedness.  In addition, an upsize of an existing loan that is provided pursuant to a multibank credit facility may necessitate consent of the lenders in the syndicate and will give rise to various other considerations under the existing loan documentation, including limitations on the incurrence of additional indebtedness and liens, potential effects on existing leverage ratios and other financial covenants, and the possible triggering of most favored nation provisions that may allow for adjustment of the terms of existing term loans commensurate with the more attractive terms of the Main Street Program.

Accordingly, prospective borrowers should leverage existing banking relationships if possible to begin exploring the amount of financing that may be available to them and begin reviewing any existing credit facilities to evaluate compatibility with the terms of the Main Street Program.

If you have questions about the Main Street Program and what it means for your business, please contact the authors.