Client Alert: Main Street Business Lending Program is Another Option for Struggling Businesses

Date: April 13, 2020
On Thursday April 9, 2020, Treasury Secretary Steven Mnuchin and the Federal Reserve Bank announced creation of a Main Street Business Lending Program to bolster the flow of credit primarily to mid-sized businesses impacted by the coronavirus pandemic. Under the Main Street Business Lending Program (the “MSBLP”), up to $600 billion in new financing is available for certain eligible businesses, as described below, pursuant to authority granted under Section 4003(c)(3)(D) of the CARES Act. This program is in addition to, and distinct from, the Paycheck Protection Program ("PPP") loans targeted to small businesses. 
The MSBLP involves the creation of two new loan facilities by the Federal Reserve, the Main Street New Loan Facility and the Main Street Expanded Loan Facility, each to enable loans by eligible lenders. Under the Main Street New Loan Facility, eligible loans are those originated on or after April 8, 2020, and for the Main Street Expanded Loan Facility, eligible loans are those originated before April 8, 2020 that are subsequently upsized. The Federal Reserve and Treasury are still finalizing the MSBLP and are accepting comments until April 16, 2020; therefore, the following information is subject to change.
Eligible Borrowers for an MSBLP Loan
Businesses and nonprofits with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues are eligible, provided that the borrower requires financing due to exigent circumstances presented by the coronavirus pandemic. Borrowers must also have been 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 will also need to have positive earnings before interest, taxes, depreciation, and amortization (“EBITDA”) for calendar year 2019.
Businesses that are debtors in a bankruptcy proceeding are not be eligible for an MSBLP loan.
It is notable that the CARES Act targets employers with at least 500 employees for participation in the MSBLP, but the announcements to-date do not suggest a minimum number of employees to qualify for this program. 
Bank Lending with Federal Reserve Back-Stop
Eligible lenders include all U.S. insured depository institutions and other U.S.-based lenders. Borrowers will apply through banks offering such loans. Until September 30, 2020, the Federal Reserve Bank will purchase 95 percent participations in qualifying loans made under this program from the lenders, up to $600 billion in total principal amount.
MSBLP Loan Terms
Eligible borrowers will benefit from a loan under the MSBLP by receiving the following terms:
  • A minimum loan size of $1 million
  • Maximum loans size of the lesser of
    • For new loans, (i) $25 million or (ii) an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed four times the borrower’s 2019 EBITDA.   
    • For existing loans, (i) $150 million, (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 debt, does not exceed six times the borrower’s 2019 EBITDA.
  • Four year maturity
  • Amortization of principal and interest deferred for one year
  • Adjustable interest rates of the Secured Overnight Financing Rate ("SOFR") + 250-400 basis points. At the current SOFR of 0.01% the interest would range from 0.26% to 0.41%; however, it is notable that the SOFR was 2.46% one year ago.
  • No prepayment penalty
  • An origination fee of 100 basis points of the principal amount of the MSBLP loan
Restrictions on MSBLP Loan Recipients and Required Certifications
Borrowers should consider these restrictions and certifications required for an MSBLP loan:
  • The borrower must commit to refrain from using the proceeds of the MSBLP loan to repay other loan balances.
  • The borrower must 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 MSBLP loan in full.
  • The borrower must attest that it will not seek to cancel or reduce any of its outstanding lines of credit.
  • The borrower must attest that it requires financing due to the exigent circumstances presented by the coronavirus disease 2019 pandemic.
  • The borrower must attest that, using the proceeds of the MSBLP loan, it will make reasonable efforts to maintain its payroll and retain its employees during the term of the MSBLP loan. The CARES Act itself states that MSBLP loan proceeds must be used to retain at least 90 percent of the borrower’s workforce at full compensation and benefits until September 30, 2020, rather than only using “reasonable efforts” as the announcement from Treasury suggests.
  • The borrower must attest that it will follow compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act:
    • Until the date 12 months after the date on which the MSBLP loan is no longer outstanding, a borrower may not repurchase an equity security that is listed on a national securities exchange of such borrower or any parent company of such borrower while the MSBLP loan is outstanding, except to the extent required under a contractual obligation that is in effect as of the date of enactment of the CARES Act. 
    • Unless waived by Treasury, until the date 12 months after the date on which the MSBLP loan is no longer outstanding, a borrower may not pay dividends or make other capital distributions with respect to its common stock.
    • During the period beginning on the date on which the MSBLP loan agreement is executed and ending on the date that is one year after the date on which the loan or loan guarantee is no longer outstanding, highly paid officers and executives are prohibited from increasing the compensation of any employee whose compensation exceeds $425,000 or from offering them significant severance or termination benefits. There are even stricter limits on the compensation of executives who made in excess of $3,000,000 during 2019. 
    • Borrowers will certify that they will not abrogate any collective bargaining agreements during the term of the loan and for a period of two years thereafter and will remain neutral in any union organizing effort during the term of the loan.
  • Borrowers will be required to certify that it is eligible to participate in the MSBLP, including in light of the conflicts of interest prohibition in section 4019(b) of the CARES Act. The conflicts of interest provisions provide that any business that is directly or indirectly owned by the president, senior executive branch officials or members of congress (or their family members) is prohibited from participating in CARES Act programs.
Ways to Prepare
While the date on which banks will begin to offer MSBLP loans has not yet been finalized, potential borrowers can prepare by
  • Discussing with key stakeholders in the company whether to seek the financing, given the terms and restrictions on company conduct while the loan is outstanding;
  • Gathering ownership information;
  • Analyzing the size of the loan available and needed, and the purpose of the funds;
  • Preparing a statement regarding the impact of COVID-19 pandemic on the company, to demonstrate the need for the financing;
  • Generating statements of the company’s existing debt and financial statements;
  • Developing a historic employment summary; and
  • Discussing the new program with your business' current lender, if applicable, including what documentation and other underwriting the lender anticipates requiring before extending credit under this program.
Final Thoughts
In response to the COVID-19 pandemic federal and state governments have developed or expanded a number of programs to ease the burden on companies ranging in size and sophistication from sole proprietorships to the Fortune 500. It appears that the MSBLP will be targeted towards mid-size companies too large for the Paycheck Protection Program (the “PPP”) due to the employee size limitation. Unlike the PPP, the MSBLP provides a larger maximum loan, but it is not forgivable and will require some collateralization. MSBLP loans also will likely involve underwriting of the borrower not permitted under the PPP. Having a longer lead-time to implementation of this new program should mitigate some of the confusion that accompanied the start of the PPP. Further announcements from the Treasury and Federal Reserve will confirm how the MSBLP will be carried out.
You should discuss with your attorney and other advisors which COVID-19 response program (or programs) are the best fit for your business.
The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.