Federal Reserve Outlines CARES Act Lending Programs for Mid-Size Businesses

Update: May 30, 2020

Fed Releases Forms and Agreements Relating to the Main Street Lending Programs

The Main Street Lending Program (MSLP) was designed to assist small- and medium-sized businesses that were in sound financial condition before the pandemic hit. It has been widely publicized but never seems to take off. Although a launch date still has not been announced, the Federal Reserve Board has released information for potential lenders and borrowers, including Frequently Asked Questions (updated as of May 27, 2020), the Loan Participation Agreement, the lender and borrower certifications and covenants, and a raft of other Forms and Agreements. The MSLP is expected to be operational in early June.

The links above also contain the most recent versions of the term sheets for the various lending facilities, Forms and Agreements, Reports to Congress, and related press releases.

Published: April 9, 2020

A lot has been written about the forgivable loans issued under the paycheck protection program (PPP), but these loans are mainly available for businesses with 500 or fewer employees. Today, the Federal Reserve announced a new lending program for larger businesses – the Main Street New Loan Facility.

This program, funded initially with $75 billion in equity from the Federal Reserve, will be used along with the Main Street Expanded Loan Facility (which provides larger loan amounts), for a combined size of up to $600 billion. The facility will be administered through a special purpose vehicle (SPV) that will make funds available to lenders, who will then lend to the ultimate borrowers. To ensure lenders have some skin in the game, the SPV will require lenders to retain a 5% interest in each loan, and the SPV will purchase the remaining 95%, though the SPV will stop purchasing loans on September 30, 2020, unless the program is extended. According to Treasury Secretary Mnuchin, this program is expected to help 40,000 companies that employ a total of 35 million Americans.
The Federal Reserve issues a press release that businesses taking advantage of PPP loans may also take out Main Street loans.

According to a term sheet issued by the Federal Reserve, the loans will have the following terms:

1. Eligible borrowers

• No more than 10,000 employees or $2.5 billion in 2019 annual revenue
• Organized in the US, have significant operations in the US, and a majority of its employees are based in the US
• Cannot also participate in the Main Street Expanded Loan Facility or the Primary Market Corporate Credit Facility

2. Terms

• 4 year, unsecured loans with no prepayment penalties
• Principal amount between $1 million and the lesser of (i) $25 million and (ii) an amount that, when added to the borrower’s existing debt and committed but undrawn debt, does not exceed 4 times the borrower’s 2019 EBITDA
• Interest rate equal to the Secured Overnight Financing Rate (currently 0.01%) plus 2.5% to 4%
• Principal and interest payments deferred for 1 year, but interest accrues as of the date the loan is made
• Origination fee of 1% of the principal amount of the loan

3. Attestations (in addition to required certifications)

• Loan will not be used to repay or refinance preexisting loans or lines of credit made by the lender to the borrower (and the lender must not cancel or reduce any existing lines of credit to the borrower)
• Borrower will not do any of the following:
  1. Use loan proceeds to repay other loans
  2. Repay debt of equal or lower priority, except for mandatory principal payments
  3. Cancel or reduce its outstanding lines of credit with any lender
• Borrower requires financing due to COVID-19 and it will use the loan proceeds to make reasonable efforts to maintain its payroll and to retain its employees during the loan term
• Borrower will maintain 4x leverage relative to EBITDA over the term of the loan
• Borrower will abide by the compensation, stock repurchase, and distribution provisions in section 4003 of the CARES Act

If you have any questions about the Main Street Expanded Loan Facility, please reach out to your Withum advisor.