Fed Authorizes $600 Billion Main Street Lending Programs for Small and Mid-Sized Businesses

On April 9, 2020, the Federal Reserve Board (the “Fed”) authorized up to $2.3 trillion in loans through various facilities, including the Main Street Lending Program, which will offer four-year loans to companies with fewer than 10,000 employees and less than $2.5 billion in 2019 revenue.

The Fed will purchase up to $600 billion in loans through two facilities: (i) the Main Street New Loan Facility, which will purchase new loans originated through this program, and (ii) the Main Street Expanded Loan Facility, which will purchase existing loans that undergo a size increase through this program. The Fed’s press release can be found here.

Eligibility

Per the Main Street New Loan Facility and the Main Street Expanded Loan Facility, eligible borrowers must be “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.” Borrowers may only participate in one but not both of the two Main Street Lending Program facilities, and may not also participate in the Primary Market Corporate Credit Facility, discussed in the same press release, if the borrower participates in either of the Main Street Lending Programs. Companies that borrowed or plan to borrow through the Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) may also participate in this program. Borrowers must have 10,000 or fewer employees and must have has $2.5 billion or less in 2019 revenue. Currently, the Fed plans on participating in this program until September 30, 2020.

Loan Terms

All Main Street Lending Program loans have a four-year maturity at a minimum loan size of $1 million, although maximum loan size varies as described below. Unlike the PPP, both Main Street Lending Programs are recourse to the borrower and not subject to forgiveness. Like the PPP, loans under these programs are unsecured. Principal and interest payments may be deferred for one year. Loans will have an adjustable interest rate of the Secured Overnight Financing Rate plus 250 to 400 basis points. The borrower will pay the lender a 100 basis point origination fee.

For the Main Street New Loan Facility, the maximum loan size is the lesser of (i) $25 million or (ii) an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, is less than four times the company’s 2019 EBITDA.

For the Main Street Expanded Loan Facility, the maximum loan size is the lesser of (i) $150 million, (ii) 30% of the borrower’s existing outstanding and committed but undrawn debt, or (iii) an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, is less than six times the company’s 2019 EBITDA.

Representations and Covenants

Borrowers are required to attest that:

• Loan proceeds will not be used to repay other loan balances.
• Other borrower debt of equal or lesser priority shall not be paid at all, except for mandatory principal payments, until the Main Street loan is paid in full.
• It will not seek to cancel or reduce its outstanding lines of credit with any lender.
• It requires financing due to the events of the coronavirus pandemic.
• It will make reasonable efforts to maintain payroll and retain its employees.
• It meets the EBITDA leverage conditions stated in the loan terms.
• Until one year after the loan is no longer outstanding, it will not repurchase its own or a parent company’s publicly traded equity securities unless contractually required in a contract in effect before March 27, 2020 (as set forth in the CARES Act).
• Until one year after the loan is no longer outstanding, it will not pay dividends or make other common stock capital distributions (as set forth in the CARES Act).
• Until one year after the loan is no longer outstanding, no officer or employee of a borrower that received more than $425,000 in total compensation in 2019: (a) may receive compensation in excess of their total 2019 compensation for any 12-month period, or (b) may receive severance in excess of twice their total 2019 compensation (as set forth in the CARES Act).
• Until one year after the loan is no longer outstanding, no officer or employee of a borrower that received total compensation of more than $3 million in 2019 may receive compensation of more than: (a) $3 million, plus (b) 50% of total 2019 compensation in excess of $3 million, for any 12-month period (as set forth in the CARES Act).
• Covered individuals under Section 4019 of the CARES ACT (generally, members of the executive branch and members of Congress) do not own a “Controlling Interest” (as defined in the CARES Act) in the borrower.

Lenders are required to attest that:

• The proceeds of the loan will not be used to repay or refinance existing debt made by the lender to the borrower.
• It will not cancel or reduce existing lines of credit outstanding to the borrower.
• Covered individuals under Section 4019 of the CARES ACT (generally, members of the executive branch and members of Congress) do not own a “Controlling Interest” (as defined in the CARES Act) in the borrower.

Lenders will retain 5% of each loan, and the remaining 95% of each loan will be sold to either the Main Street New Loan Facility or Main Street Expanded Loan Facility special purpose vehicles, which will purchase up to $600 billion of loans in the aggregate.

We understand that these are challenging times for our clients and friends. Kleinberg Kaplan has been diligently monitoring the updates and developments pertaining to COVID-19 and the potential impact for our clients. We will continue to provide updates as the situation develops.

Our attorneys are available to discuss with you these provisions, as well as other COVID-19 legislation, regulations and executive orders. You can find other helpful COVID-19 related materials here, at our COVID-19 resource page.