Fed Launches Main Street Lending Programs for Small and Mid-Sized Businesses
April 10, 2020
By: Rod Kubat
On April 9, 2020, the Federal Reserve Board (FRB) announced a number of actions it had taken to provide up to $2.3 trillion in loans to support the economy, including implementing Main Street Lending programs under the authority granted to it by Sections 4003(b)(4) and (c)(3) of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”).
The FRB announced the Main Street Lending New Loan Facility (MSNLF) for new loans originated on or after April 8, 2020 and the Main Street Lending Expanded Loan Facility (MSELF) for existing loans originated before April 8, 2020 and that will be upsized. These programs provide banks access to funds with which to make Main Street Loans to eligible small and medium-sized businesses by selling to the MSNLF or MSELF 95% participations in the loans and retaining a 5% participation interest in the loans sold. The Main Street Loan facilities will provide up to $600 billion to banks that make Main Street Loans.
Eligible Businesses: Small and mid-sized businesses that employ up to 10,000 workers or have 2019 annual revenues of less than $2.5 billion and were in good financial standing before the COVID-19 crisis are eligible under the Main Street Lending programs. These businesses 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 the business’ employees based in the United States. A Main Street Loan borrower is required to certify that the Main Street Loan is needed due to the exigent circumstances presented by the COVID-19 pandemic. In addition, the borrower must commit that, using the proceeds of the Main Street Loan, it will make reasonable efforts to maintain its payroll and retain its employees during the term of the Main Street Loan. The Borrower must also agree to follow compensation, stock repurchase, and dividend restrictions that apply to direct loan programs under the CARES Act. Eligible businesses that have taken advantage of the Paycheck Protection Program can also obtain Main Street Loans, but not under both MSNLF and MSELF.
MSNLF Loan Terms: Main Street Loans under MSNLF will be unsecured, have a 4-year term with variable interest rates based upon SOFR (Secured Overnight Financing Rate) plus a margin of 2.50% to 4.00%. The minimum amount of the MSNLF Main Street Loan is $1,000,000, and the maximum amount is the lesser of (i) $25,000,000 or (ii) an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed four times the company’s 2019 EBITDA. Principal and interest payments will be deferred for one year. There is no penalty for prepayment.
MSELF Loan Terms: Main Street Loans under MSNLF may be secured by existing or new collateral, have a 4-year term with variable interest rates based upon SOFR plus a margin of 2.50% to 4.00%. The minimum amount of the Main Street Loan is $1,000,000; while the maximum amount is the lesser of (i) $150,000,000, (ii) 30% of the borrower’s existing outstanding and committed but undrawn bank debt, or (iii) an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed six times the borrower’s 2019 EBITDA. Principal and interest payments will be deferred for one year. There is no penalty for prepayment.
Fees: The borrower will be required to pay the Bank an origination fee of 100 basis points (1.00%) of the principal amount of the Main Street Loan. The Bank pays the Main Street facility a facility fee equal to 100 basis points (1.00%) of the 95% participation amount and is authorized, but not required, to require the borrower to pay this facility fee. The applicable Main Street facility will pay the Bank an annual loan servicing fee equal to 25 basis points (0.25%) of the principal amount of its participation in the Main Street Loan.
Restrictions: Main Street Loans cannot be used to refinance existing loans with the banks, including the existing portion of the loan that was upsized under MSELF, or to repay other loan balances. In addition, both the bank and the borrower must make commitments not to cancel or terminate existing lines of credit, including, in the case of the borrower, with other lenders. The borrower must also commit to refrain from repaying other debt of equal or lower priority, with the exception of mandatory principal payments, unless the borrower has first repaid the applicable Main Street Loan in full.
Availability of the Programs: The Main Street Loan Facilities will cease purchasing participations in Main Street Loans on September 30, 2020, unless the FRB and the Treasury Department extend the Facilities.
For more information, please contact your Nyemaster Goode attorney.
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