April 15, 2020
CARES Act Stimulus Comes to Main Street on the Wings of the Federal Reserve
By Timothy Davis •
As we near the point of exhausting the initial (hopefully) allocation of funds for the Small Business Administration’s Paycheck Protection Program, we can now pivot to the next stimulus mechanism being implemented by the Federal Reserve – Main Street Lending. There are two separate components of the Main Street Lending program (New Loans and Expanded Loans). The details of the Main Street Lending programs are still limited, since the initial release of information by the Federal Reserve only occurred on April 9, 2020. A summary of what we know so far is set out below.
The Main Street New Loan Facility (“MSNLF”) and the Main Street Expanded Loan Facility (MSELF) are intended to facilitate lending to small and medium-sized businesses by Eligible Lenders. The combined size of the MSNLF and the MSELF will not exceed $600 billion.
Under both facilities, Eligible Lenders are U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies. 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.
An MSNLF 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:
1.4 year maturity;
2.Amortization of principal and interest deferred for one year;
3.Adjustable rate of SOFR 250-400 basis points;
4.Minimum loan size of $1 million;
5.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
6.Prepayment permitted without penalty.
The Federal Reserve, acting through a newly-created special purpose entity (“SPV”), will purchase a 95% participation in an MSNLF Eligible Loan at par value, and the Eligible Lender will retain 5% of the MSNLF Eligible Loan. The SPV and the Eligible Lender will share risk on a pari passu basis.
In addition to certifications required by applicable statutes and regulations, the following certifications will be required with respect to each MSNLF Eligible Loan:
•The Eligible Lender must attest that the proceeds of the MSNLF 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 MSNLF 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 MSNLF 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 MSNLF Eligible Loan, it will make reasonable efforts to maintain its payroll and retain its employees during the term of the MSNLF Eligible Loan.
•The Eligible Borrower must attest that it meets the EBITDA leverage condition stated in section 5(ii) of the paragraph above specifying the required features of MSNLF 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 MSNLF.
An Eligible Lender will pay the SPV an MSNLF 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.
An Eligible Borrower will pay an Eligible Lender an origination fee of 100 basis points of the principal amount of the MSNLF 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.
The MSELF is primarily the same program, with the primary differences being the definition of Eligible loans. Under the MSELF, an MSELF Eligible Loan is a term loan made by an Eligible Lender(s) to an Eligible Borrower that was originated before April 8, 2020, provided that the upsized tranche of the loan has the following features:
1.4 year maturity;
2.Amortization of principal and interest deferred for one year;
3.Adjustable rate of SOFR 250-400 basis points;
4.Minimum loan size of $1 million;
5.Maximum loan size that is the lesser of (i) $150 million, (ii) 30% of the Eligible Borrower’s existing outstanding and committed but undrawn bank debt, or (iii) an amount that, when added to the Eligible Borrower’s existing outstanding and committed but undrawn debt, does not exceed six times the Eligible Borrower’s 2019 EBITDA; and
6.Prepayment permitted without penalty.
The required certifications are slightly different for the MSELF loans, but the substance of the certifications remains the same, as do the various fees.
Sirote is focused on these facilities and will be keeping you updated as details and guidance emerge in the coming days. If you have questions or need assistance, please reach out to your Sirote attorney.
