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Legal Alert

CARES Act: The Main Street Lending Program Offers Relief for Small and Mid-Sized Businesses

April 10, 2020

On April 9, 2020, the Federal Reserve announced preliminary details of the Main Street Lending Program, a lending program established pursuant to Section 4003(C)(3)(d)(ii) of the CARES Act, which permits the Federal Reserve to make programs aimed at providing financing to small and mid-sized businesses affected by the COVID-19 pandemic. This program offers potential relief for businesses too large to take advantage of the Paycheck Protection Program ("PPP") (which is an SBA-based lending program for small companies).

The Main Street Lending Program is distinct from the yet-to-be created "Mid-Size Direct Lending Program," which is expected to provide financing to banks and other lenders who make direct loans to businesses with between 500 to 10,000 employees. Preliminary details on the Mid-Size Direct Lending Program are available at: Maslon Legal Alert: COVID-19 - Key Business Resources Under the CARES Act. It is unclear at this time whether a business may receive a loan under both the Main Street Lending Program and the Mid-Size Direct Lending Program.

The summary below provides our current understanding of the Main Street Lending Program, the terms and conditions of which may be—and likely will be—adjusted. Because many lenders are still processing PPP loan applications, additional guidance on the Main Street Lending Program (such as when and how businesses can apply) may be slow. This summary reflects current guidance released by the Federal Reserve on April 9, 2020, and will be updated as more details are made available.

Loan Overview

Under the program, eligible businesses (as defined below) can apply for either a Main Street New Loan Facility ("MSNLF") loan or Main Street Expanded Loan Facility ("MSELF") loan from eligible lenders, which are U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies. MSNLF loans are new, unsecured term loans that originate on or after April 8, 2020. MSELF loans increase the size of existing loans (originated prior to April 8, 2020) to businesses. Businesses may participate in either the MSNLF or the MSELF, but not both. Lenders can sell up to 95% of each loan to a Special Purpose Vehicle ("SPV") (with lenders retaining 5% of the loan). The Federal Reserve will purchase up to $600 billion in MSNLF and MSELF loans. The SPV will stop purchasing loans on September 30, 2020, unless the MSNLF and MSELF are extended.

Loan Eligibility

To be eligible under either the MSNLF or MSELF, businesses must:

  • Be in "good financial standing" before the crisis. It is unclear how this will be evaluated, but commentators speculate it will likely be left up to lenders given that they will retain 5% of the loan.
  • Have 10,000 (or fewer) employees or less than $2.5 billion in 2019 annual revenues.
  • Be created in the United States with significant U.S.- based employees and operations.
  • Only participate in one of the following: (i) MSNLF; (ii) MSELF; or (iii) the Primary Market Corporate Credit Facility, which the Federal Reserve established on March 23, 2020, in response to the COVID-19 pandemic to support credit to employers through new bond and loan issuance.

It is unclear whether a business will be considered together with its affiliates for purposes of determining program eligibility. Guidance is expected, but it is unclear when.

Loan Details

Although MSNLF and MSELF loans contain many similar features, they operate differently, and for purposes of clarity are discussed separately below:

MSNLF

A MSNLF loan is an unsecured term loan originating on or after April 8, 2020, with the following features:

  • 4-year maturity
  • Unsecured
  • Principal and interest payments will be deferred for one year from origination date
  • An interest rate equal to the Secured Overnight Financing Rate ("SOFR") in effect on the date the loan is made (which is published each business day by the New York Federal Reserve), plus 250-400 basis points. It is unclear whether the Federal Reserve or individual lenders will determine the rate above basis.
  • Loan to each business will be at least $1 million, but is capped at the lesser of (i) $25 million or (ii) an amount that, when added to the business's existing outstanding and committed but undrawn debt, does not exceed four times the business's 2019 earnings before interest, taxes, depreciation, and amortization ("EBITDA")
  • Pre-payment is permitted without penalty
  • Required attestations (detailed below)

MSELF

A MSELF loan is an existing term loan issued by an eligible lender to an eligible business that originated before April 8, 2020. Put otherwise, the MSELF permits eligible lenders to expand on loans previously issued to eligible businesses, provided that the upsized tranche of the loan has the features detailed below. It is unclear at this time whether any loan previously issued by an eligible lender to an eligible business may be expanded under the MSELF, or if additional restrictions are forthcoming.

  • 4-year maturity
  • May be secured or unsecured:
    • Any collateral securing a loan, whether the collateral was pledged under the original terms of the loan or at the time of upsizing, will secure the loan participation on a pro rata basis
  • Principal and interest payments will be deferred for one year from origination
  • Adjustable rate of SOFR + 250-400 basis points
  • Loan to each business will be at least $1 million, but is capped at the lesser of (i) $150 million; (ii) 30% of the business's existing outstanding and committed but undrawn bank debt; or (iii) an amount that, when added to the business's existing outstanding and committed but undrawn debt, does not exceed six times the business's 2019 EBITDA (Please note: This differs from MSNLF loans, which only requires four times the business's 2019 EBITDA.)
  • Pre-payment is permitted without penalty
  • Required attestations (detailed below), that apply with respect to the upsized tranche of each eligible loan (not the pre-existing portion of the loan)

Loan Proceed Uses

It is unclear at this time exactly how businesses may use loan proceeds under the Main Street Lending Program. However, we do know that at a minimum, businesses must use proceeds to make "reasonable efforts" to maintain payroll and retain its employees during the term of the loan.

Loan proceeds cannot be used for the following:

  • To repay or refinance pre-existing loans or lines of credit made by the lender to the business. In the context of MSELF loans, this includes using the proceeds of the upsized tranche of the MSELF loan to repay or refinance the pre-existing portion of the MSELF loan.
  • To repay other loan balances; or repay debt of equal or lower priority, with the exception of mandatory principal payments, unless the business has first repaid the MSNLF or MSELF loan in full.

Loan Restrictions

Businesses receiving a loan under the program must comply with the following stock repurchase, capital distribution, and compensation restrictions that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act:

  • Stock Repurchase: While the loan is outstanding and for 12 months thereafter, businesses cannot repurchase an equity security that is listed on a national securities exchange of the business or any parent company of the business (unless there is a contractual obligation to do so that predates March 27, 2020).
  • Capital Distribution: Until the date 12 months after the date on which the loan is no longer outstanding, business are prohibited from paying dividends or making other capital distributions with respect to the common stock of the business.
  • Compensation: Any business receiving a loan is prohibited for 12 months after the term of the loan, from:
    1. For any officer or employee whose total compensation exceeded $425,000 in calendar year 2019, providing:
      1. Compensation to such individual over such amount over any consecutive 12 months during the covered period; or
      2. Severance benefits exceeding more than two times such 2019 compensation amount.
    2. For any officer or employee whose total compensation exceeded $3,000,000 in calendar year 2019, providing compensation that exceeds the sum of:
      1. $3,000,000, plus
      2. 50% of the amount in excess over $3,000,000 that the officer or employee received in calendar year 2019.

Loan Process

The specific loan application process will be left to lenders and is not yet available. However, all applicants will be required to meet (at a minimum) the following requirements:

Fees

  • Origination Fee: For MSNLF loans, businesses will pay the lender an origination fee of 100 basis points of the principal amount of the loan. Similarly, for MSELF loans, businesses will pay the lender a fee of 100 basis points of the principal amount of the upsized tranche of the loan at the time of upsizing.
  • Facility Fee: For MSNLF loans, lenders may choose to require businesses to pay the "facility fee" that lenders are required to pay to the SPV, which is equal to 100 basis points of the principal amount of the loan participation purchased by the SPV.

Attestations

In addition to certifications required by applicable statutes and regulations, businesses must make the following attestations when applying for either a MSNLF or MSELF loan:

  1. Attest to the loan proceed use restrictions discussed above pertaining to repaying or refinancing pre-existing loans or lines of credit, and paying down other debt.
  2. Attest that it will not seek to cancel or reduce any of its outstanding lines of credit with the lender providing the loan or any other lender.
  3. Attest that it requires financing due to the exigent circumstances presented by the COVID-19 pandemic, and that, using the proceeds of the MSNLF loan (or proceeds of the upsized tranche of the MSELF loan), it will make reasonable efforts to maintain its payroll and retain its employees during the loan term.
  4. Attest it meets the EBITDA leverage condition stated above (i.e, the loan size does not exceed an amount that, when added to the business's existing outstanding and committed but undrawn debt, does not exceed 4x the business's 2019 EBITDA in the case of a MSNLF loan, or 6x the business's 2019 EBITDA in the case of a MSELF loan).
  5. 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.
  6. Certify that the entity is eligible to participate in the MSNLF or MSELF, as applicable, including in light of the conflicts of interest prohibition in Section 4019(b) of the CARES Act, which prohibits business from receiving funds if they are directly or indirectly owned by the President, certain executive branch officials, or members of Congress.

We Can Help

Please contact Maslon's Corporate & Securities Group if you have questions regarding the Main Street Lending Program.

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