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Federal Reserve Announces Roll Out of Main Street Lending Program

The Federal Reserve on April 9, 2020 announced the basic preliminary terms of its Main Street Lending Program ("MSLP") authorized under the CARES Act. The MSLP will enhance support for small and mid-sized businesses "that were in good financial standing before the crisis" by offering 4-year loans to companies employing up to 10,000 workers or with revenues of less than $2.5 billion.

The MSLP offers non-forgivable (unlike the Paycheck Protection Program) loans from private banks in two varieties: (1) a new loan with a maximum loan amount of $25 million (a "New Facility") (New Facility Term Sheet.pdf), and (2) an additional tranche expanding an existing term loan with a maximum loan amount up to $150 million (an "Expanded Facility") (Expanded Facility Term Sheet.pdf).

This MSLP is authorized by the CARES Act and is being implemented by the Federal Reserve under the authority of Section 13(3) of the Federal Reserve Act, with approval of the Treasury Secretary. The Fed and the Department of Treasury have the right to modify these terms, which will be placed on the Fed's website. The Fed will be taking comments until April 16, 2020, prior to the formal roll out of the program.

Features: While there remain unanswered questions regarding the MSLP, following is a high-level summary of the key features based on information released to date:

  • Participation A borrower can participate in a New Facility or an Expanded Facility, but not both. The Fed and lender share the loan risk on a 95%/5% pari pasu basis (the Fed will set up an entity and fund it to purchase 95% of a Main Street Loan). This 5% bank exposure (compared to the PPP loans being 100% government guaranteed) may impact the bank underwriting requirements.
  • Relationship to PPP Loans:  Main Street Loans are in addition to PPP loans and will be made by private banks, including FDIC insured banks, US bank holding companies and US savings and loan holding companies.
  • Eligibility:  Borrowers can have up to 10,000 employees or up to $2.5 billion in 2019 annual revenues.
  • Forgiveness:  These are loans and no portion is forgivable.
  • Amount to be Borrowed (New Facility): Minimum size is $1,000,000 and maximum size is the lesser of: (i) $25 million, or (ii) the amount when added to the borrower's existing and committed but undrawn bank debt does not exceed 4 times the Borrower's 2019 EBITDA.
  • Amount to be Borrowed (Expanded Facility): Minimum size is $1,000,000 and maximum size is the lesser of: (i) $150 million, (ii) 30% of borrower's existing outstanding and committed but undrawn debt, or (iii) the amount when added to the borrower's existing and committed but undrawn bank debt does not exceed 6 times the Borrower's 2019 EBITDA.
  • Interest Rate:  SORF (the reference rate established as an alternative to Libor) + 250-400 basis points.
    Amortization:  Four (4) year loan, with principal and interest deferred for one year.
  • Security:  The term sheets indicate the New Facility loans will be unsecured and if the existing loan that is expanded with an Expanded Facility was secured, that security would extend to the expanded portion on a pari pasu basis.
  • Guarantee: The Fed did not provide guidance yet on whether guarantees will be required.
  • Important Restrictions: The borrower will be subject to important restrictions on excessive salary and bonuses to highly compensated individuals, distributions and dividends to owners, and stock buybacks.
  • Other Borrower Commitments:  The borrower must certify various things to the lender including using "reasonable efforts" to maintain "payroll and employees" during the term of the loan, as well as certain EBITDA leverage ratios, and the intent to not cancel, reduce or prepay other credit facilities.
  • Origination Fee:  The borrower will pay a 100 basis point Origination Fee on the amount of the loan.
  • End Date:  The Fed will stop buying the loans after Sept. 30, 2020, so banks will cease making these loans by that date.

Visit the Coolidge COVID-19 Resource Center for additional information.

Disclaimer: The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls, letters and electronic mail.

 

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