On April 9, 2020, the Federal Reserve issued administrative guidance in the form of term sheets detailing its Main Street Lending Program authorized under Title IV, Subtitle A of the Coronavirus Aid, Relief, and Economic Stabilization Act (the “CARES Act”). The Main Street Lending Program offers loans to eligible businesses with up to 10,000 employees or revenues of up to $2.5 billion in 2019. In so doing, the Main Street Lending Program provides an alternative form of financial relief to businesses impacted by the coronavirus pandemic that may not be eligible for other loan programs, such as the Economic Injury Disaster Loan and the Paycheck Protection Program administered by the Small Business Administration, due to their size or other factors.
To implement the Main Street Lending Program, the Federal Reserve Bank will establish a special purpose entity to purchase 95% of Main Street loans from participating lenders. Applicable lenders will retain the remaining 5% of the loans. The special purpose entity will stop purchasing Main Street loans on September 30, 2020, unless the Federal Reserve extends the duration of the program facility. The program will be divided into two types of loans: “expanded” loans under which additional funds may be added to existing loans that were in place before April 8, 2020, and new loans originating on or after April 8, 2020.
The Federal Reserve issued term sheets detailing some of the central aspects of each type of Main Street loan. The key features of the Main Street loans as set forth in the term sheets are outlined as follows:
- Mature 4 years from date of origination
- Deferred amortization of principal and interest for one year
- Adjustable financing rate of 250-400 basis points
- Minimum loan amount is $1 million
- Maximum loan amount is the lesser of (i) $25 million or (ii) an amount that, when added to the borrower’s existing outstanding but undrawn debt, does not exceed 4 times the borrower’s earnings before interest, taxes, depreciation, and amortization (“EBITDA”) for 2019
- No prepayment penalty
- No collateral requirement for new loans
Prospective borrowers will be required to make the following attestations, in addition to other certifications required under applicable law:
- The proceeds will not be used to repay or refinance pre-existing loans or lines of credit made by the lender to the borrower
- The borrower must commit to refrain from using the proceeds to repay other loan balances, including loans of equal or lower priority (except for mandatory principal payments), unless the Main Street loan is paid in full
- The borrower needs the loan due to the exigent circumstances presented by the coronavirus disease, and the borrower will make reasonable efforts to maintain its payroll and retain its employees during the term of the loan
- The borrower meets the EBITDA leverage conditions specified above
- The borrower will adhere to the restrictions on compensation, stock repurchase and capital distribution contained in Section 4003(c)(3)(A)(ii) of the CARES Act
- The borrower is eligible to participate in the Main Street Lending Program and is not precluded from receiving a loan under the program, including by virtue of the conflict of interest provisions set forth in Section 4019(b) of the CARES Act, which prohibits Main Street loans to entities owned by members of the Executive cabinet or Congress
Additionally, pursuant to the CARES Act borrowers under the Main Street Lending Program must (i) refrain from outsourcing or offshoring their labor for the duration of the loan and two years after the loan has been repaid, (ii) refrain from abrogating collective bargaining agreements for the duration of the loan and two years after the loan has been repaid, and (iii) remain neutral in any union organizing efforts for the duration of the loan.
Borrowers under the Main Street Lending Program can still receive other financial assistance, including loans made under the Paycheck Protection Program, if they are otherwise eligible for such programs. However, a borrower cannot receive both an expanded loan and a new loan under the Main Street Lending Program. More information about other forms of relief available under the CARES Act can be found here.
The Federal Reserve is expected to issue further guidance on the terms and mechanics of the Main Street Lending Program soon on its website, and until such further guidance is made available the loan terms described above are subject to change. In the meantime, businesses facing financial hardship due to the coronavirus pandemic, particularly businesses that are not eligible for other forms of economic relief, may consider borrowing under the Main Street Lending Program.
As always, Nason Yeager is here for you 24/7 to assist in any way we can. We hope everyone stays safe and healthy through these unprecedented times.