Main Street Lending Program:  Summary as of May 20, 2020

by Nancy A. D. Hancock and Joshua S. Cole

Federal Reserve Board program announced April 9, 2020:

  • Intended to assist small and medium sized businesses deal with the economic fallout caused by the COVID-19 pandemic
  • Borrower must represent that exigent circumstances presented by the COVID-19 pandemic necessitate loan, and that using the loan proceeds, reasonable efforts will be made to maintain payroll and retain employees during the loan term (4 years)
  • Borrower must meet the EBITDA leverage condition required for eligibility for the loan
  • Relief provided:
    • 4-year term loan
    • Provided to small and medium sized businesses
    • P& I deferred for 1 year (unpaid interest will be capitalized)
    • No exclusion for borrowers under SBA’s Paycheck Protection Program
    • No prepayment penalty
    • Origination fee of 1% payable to lender
    • Facility fee payable to SPV = to 1% of P participation purchased by SPV (due from lender, but lender may charge borrower)
    • 3 kinds of loans
      • Main Street New Loan Facility--(originated on or after April 24, 2020)
      • Main Street Priority Loan Facility--(originated before April 24, 2020)
      • Main Street Expanded Loan Facility--(adds term debt to a current facility originated before April 24, 2020 and has a remaining maturity of at least 18 months))
    • Loan size depends on facility and is EBITDA-based
      • New Loan Facility-
        • 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, does not exceed four (4) times the borrower’s 2019 earnings before interest, taxes, depreciation and amortization (“EBITDA”)
        • Secured or Unsecured
      • Expanded Loan Facility
        • Maximum loan size is the lesser of (i) $200 million, (ii) 35% 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 that is in pari passu (on equal footing) with the loan and equivalent in secured status (i.e., secured or unsecured), does not exceed six (6) times the borrower’s 2019 EBITA
        • Secured or unsecured. Any collateral, whether pledged under the original terms of the loan or at the time of upsizing, will secure the loan participation on a pro rata basis.

Other loan terms as amended by new rules added April 30, 2020:

  • Eligibility updates
    • business must have been established before March 13, 2020
    • business must meet at least one of the following two conditions:
      • (i) has 15,000 employees or fewer (was previously 10,000 or fewer), or
      • (ii) had 2019 annual revenues of $5 billion or less (was previously $2.5 billion or less)
    • business is now defined as “an entity that is organized for profit as a partnership; a limited liability company; a corporation; an association; a trust; a cooperative; a joint venture with no more than 49 percent participation by foreign business entities; or a tribal business concern as defined in 15 U.S.C. § 657a(b)(2)(C)…”.
    • not-for-profits are now specifically excluded from the Main Street Lending Program. In explaining the rational for the exclusion, the Federal Reserve Board stated that it recognizes that the credit risk of non-profit organizations, as a matter of practice, is generally not evaluated on the basis of EBITDA, which is the key underwriting metric required for eligibility under the Main Street Lending Program.
  • Loan term changes:
    • minimum loan size is now $500,000 (previously $1 million)
    • principal and interest payments will still be deferred for the first year, however, interest will be capitalized
    • interest will now be calculated at the 1-month or 3-month LIBOR Rate plus 3.00% (previously the Secured Overnight Financing Rate (SOFR) plus 2.50% to 4.00%)
  • New requirements added:
    • if borrower had other loans with the lender as of December 31, 2019, such loans must have had an internal risk rating equivalent to a “pass” in the Federal Financial Institutions Examination Council’s supervisory rating system on that date
    • lenders expected to assess each potential borrower’s financial condition at the time of the potential borrower’s application
    • the methodology used by lender to calculate adjusted 2019 EBITDA to determine borrower’s eligibility must be the methodology it has previously used for adjusting EBITDA when extending credit to borrower or similarly situated borrowers before April 24, 2020
    • the eligible borrower must certify that it has a reasonable basis to believe that, as of the date of origination of the loan and after giving effect to such loan, it has the ability to meet its financial obligations for at least the next 90 days and does not expect to file for bankruptcy during that time period
  • Other requirements:
    • Compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act, apply from loan origination until one (1) year after loan repayment:
      • officers and employees whose total 2019 compensation exceeded $425,000 is frozen (on a 12 consecutive months basis) (except for certain compensation determined through an existing collective bargaining agreement entered into before March 1, 2020)
      • officers and employees whose pay exceeds $425,000 cannot receive severance pay in excess of twice their total 2019 compensation
      • no officer or employee whose total 2019 compensation exceeded $3 million may receive pay (on a 12 consecutive months basis) in excess of the sum of (i) $3,000,000 and (ii) 50% of the excess over $3,000,000 of total 2019 compensation
    • For one (1) year after repayment, no stock buybacks of equity securities listed on a national securities exchange of borrower or parent (with exceptions for contractual obligations entered into before March 27, 2020) and no dividend payments or capital distributions on common stock of the borrower
    • Prohibition against repaying other loan balances with proceeds
    • Prohibition against repaying other debt of equal or lower priority (exception for mandatory principal payments), unless the borrower has first repaid the loan in full
    • Attestation not to seek to cancel or reduce any of its outstanding lines of credit

Pullman and Comley has experienced and knowledgeable commercial finance professionals working hard to assist their clients during these unprecedented and uncertain times.  For specific guidance or more information, whether you are a business applying for a Main Street Lending Program loan or a lender looking to make a Main Street Lending Program loan, please contact us.

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