The Paycheck Protection Program has dominated the headlines for nearly a month, offering relief to small business across the US as they deal with the economic impact of COVID-19. This program, while extremely helpful, left a large portion of the US business market unserved. Many mid-market organizations, as well as, those supported by Private Equity found themselves unable to access the lifeline the PPP program provided.
The Main Street Lending Program, authorized under section 13 (3) of the Federal Reserve Act, was designed to offer enhanced support for small and mid-sized businesses that were in good financial standing before the crisis, opening up availability to many underserved COVID-19 relief companies. This program offers 4-year loans to companies employing up to 10,000 workers or with revenues of less than $2.5 billion. Principal and interest payments will be deferred for one year. Eligible banks may originate new Main Street loans or use Main Street loans to increase the size of existing loans to businesses. These banks will retain a 5 percent share, selling the remaining 95 percent to the Main Street facility, which will purchase up to $600 billion of loans.
The MSLP is comprised of two primary Facilities, the Main Street New Load Facility (MSNLF) and the Main Street Expanded Loan Facility (MSELF). Here are some key points to know:
Eligible Borrowers: Eligible Borrowers are businesses with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues. Each Eligible Borrower must be a business that is created or organized in the United States or under the laws of the United States with significant operations in and a majority of its employees based in the United States. Eligible Borrowers that participate in the Facility may not also participate in the MSELF or the Primary Market Corporate Credit Facility.
Eligible Loans: An Eligible Loan is an unsecured term loan made by an Eligible Lender(s) to an Eligible Borrower that was originated on or after April 8, 2020, provided that the loan has the following features:
- 4 year maturity;
- Amortization of principal and interest deferred for one year;
- Adjustable rate of SOFR + 250-400 basis points;
- Minimum loan size of $1 million;
- Maximum loan size that is the lesser of (i) $25 million or (ii) an amount that, when added to the Eligible Borrower’s existing outstanding and committed but undrawn debt, does not exceed four times the Eligible Borrower’s 2019 earnings before interest, taxes, depreciation, and amortization (“EBITDA”); and
- Prepayment permitted without penalty.
Loan Participations: The SPV will purchase a 95% participation in an Eligible Loan at par value, and the Eligible Lender will retain 5% of the Eligible Loan. The SPV and the Eligible Lender will share risk on a pari passu basis.
Required Attestations: In addition to certifications required by applicable statutes and regulations, the following attestations will be required with respect to each Eligible Loan:
- The Eligible Lender must attest that the proceeds of the Eligible Loan will not be used to repay or refinance pre-existing loans or lines of credit made by the Eligible Lender to the Eligible Borrower.
- The Eligible Borrower must commit to refrain from using the proceeds of the Eligible Loan to repay other loan balances. The Eligible Borrower must commit to refrain from repaying other debt of equal or lower priority, with the exception of mandatory principal payments, unless the Eligible Borrower has first repaid the Eligible Loan in full.
- The Eligible Lender must attest that it will not cancel or reduce any existing lines of credit outstanding to the Eligible Borrower. The Eligible Borrower must attest that it will not seek to cancel or reduce any of its outstanding lines of credit with the Eligible Lender or any other lender.
- The Eligible Borrower must attest that it requires financing due to the exigent circumstances presented by the coronavirus disease 2019 (“COVID-19”) pandemic, and that, using the proceeds of the Eligible Loan, it will make reasonable efforts to maintain its payroll and retain its employees during the term of the Eligible Loan.
- The Eligible Borrower must attest that it meets the EBITDA leverage condition stated in section 5(ii) of the paragraph above specifying required features of Eligible Loans.
- The Eligible Borrower must attest that it 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.
- Eligible Lenders and Eligible Borrowers will each be required to certify that the entity is eligible to participate in the Facility, including in light of the conflicts of interest prohibition in section 4019(b) of the CARES Act.
Facility Fee: An Eligible Lender will pay the SPV a facility fee of 100 basis points of the principal amount of the loan participation purchased by the SPV. The Eligible Lender may require the Eligible Borrower to pay this fee.
Loan Origination and Servicing: An Eligible Borrower will pay an Eligible Lender an origination fee of 100 basis points of the principal amount of the Eligible Loan. The SPV will pay an Eligible Lender 25 basis points of the principal amount of its participation in the Eligible Loan per annum for loan servicing.
Facility Termination: The SPV will cease purchasing participations in Eligible Loans on September 30, 2020, unless the Board and the Treasury Department extend the Facility. The Reserve Bank will continue to fund the SPV after such date until the SPV’s underlying assets mature or are sold.