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Federal Reserve Makes Additional Money Available to Small and Mid-Sized Businesses
On April 9, 2020, the Federal Reserve announced the details of the Main Street Lending Program (the Program), which is a lending program authorized by the CARES Act for purposes of supporting the economy during the COVID-19 pandemic. Under the Program, up to $600 billion will be provided to eligible lenders to make qualifying loans to eligible businesses.
Here is a summary of the key terms:
Eligible Borrowers
Eligible borrowers are small and mid-sized businesses with up to 10,000 employees or with less than $2.5 billion in 2019 annual revenues. The Program therefore is applicable to many businesses that were ineligible for the Paycheck Protection Program, although the Federal Reserve stated that borrowers could receive a loan under the Program even if they had “taken advantage of” the Paycheck Protection Program. In addition, a borrower must be organized in the U.S. with significant domestic operations and have a majority of its employees residing in the U.S. There is a potential for significantly more money available to borrowers under the Program compared to the Paycheck Protection Program.
The CARES Act notably authorized the Treasury Secretary to implement a program or facility to provide direct financing to banks and lenders that make direct loans to businesses and nonprofit organizations with between 500 and 10,000 employees. The Program is different and is not subject to the same restrictions as those referenced in the CARES Act and applicable to the yet-to-be announced Treasury program (which may or may not come to fruition).
Eligible Lenders
Eligible lenders under the Program include U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies.
Loan Terms
- Unsecured
- 4-year term with 1-year deferral of amortization of principal and interest
- Adjustable interest rate equal to the Secured Overnight Financing Rate (currently .01%) plus 250 to 400 basis points (2.5%-4%)
- Loan size of $1 million up to the lesser of $25 million or amount that when added to existing outstanding debt and committed but undrawn debt, will not exceed four times the borrower’s 2019 EBITDA
- If borrowers are adding Program debt to existing loans (originated before April 8, 2020), the maximum total amount is equal to the lesser of:
- $150 million;
- 30% of the applicant’s existing outstanding and committed but undrawn bank debt; and
- an amount that, when added to the applicant’s existing outstanding and committed but undrawn debt, does not exceed six times 2019 EBITDA.
- Prepayment will be permitted without penalty
- Loan origination fee of 1%
Requirements
Among others, the following attestations will be required from the borrower or the lender:
- The lender must attest that loan proceeds may not be used to repay or refinance existing pre-existing indebtedness and that it will not cancel or reduce any existing lines of credit outstanding to the borrower.
- The borrower must commit to refrain from using loan proceeds to repay other loan balances.
- The borrower must attest that it requires financing due to circumstances presented by the COVID-19 pandemic and that it will make reasonable efforts to maintain its payroll and retain its employees during the loan term.
- The borrower must attest that it will follow certain compensation, stock repurchase, and capital distribution restrictions. These include restrictions on dividends for the duration of the loan plus one year.
Notably absent from these certifications are others that are required under the separate Developing Program that the Treasury Secretary was encouraged to implement, including the prohibition on outsourcing jobs and on abrogating collective bargaining agreements, and the requirement to remain neutral in any union organizing efforts during the term of the loan.
Potential applicants must consider restrictions contained in their existing loan facility documentation and other contracts, as well as requirements that may be contained in their organizational documents. The Federal Reserve will be receiving comments on the Program over the next week and modifications may follow.
Certainly borrowers not eligible for Paycheck Protection loan assistance should consider applying for financing under the Program. In addition, borrowers eligible for the Paycheck Protection Program should also consider Program financing as either a supplementary source of liquidity or potentially an alternative to the Paycheck Protection Program depending upon their operational needs.
We will continue to monitor the Federal Reserve’s announcements regarding the details of the Main Street Lending Program. Please contact Mark Turner, Jim Catanzaro, Justin Furrow, or your relationship attorney if you have questions or need additional information.
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The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings, and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. In some cases, the underlying legal information is changing quickly in light of the COVID-19 pandemic. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship. Please contact your legal counsel for advice regarding specific situations.
