Yesterday, the Federal Reserve announced a new “Main Street” Lending Program that will facilitate lending by banks and other financial institutions to mid-size businesses. The program is comprised of two separate facilities: the “Main Street New Loan Facility” and the “Main Street Expanded Loan Facility.”
Under the CARES Act enacted on March 27, 2020, Congress appropriated $454 billion for the Department of the Treasury to use for new programs at the Federal Reserve, including the Main Street Lending Program. The Department of the Treasury announced yesterday that it will use a portion of the funds appropriated under the CARES Act to make a $75 billion equity investment in a new special purpose entity created by the Federal Reserve.
Through leverage, the combined size of the new facility will be up to $600 billion. Each dollar of the $75 billion equity investment provided by the Treasury should allow for banks and other financial institutions to make approximately eight times that amount (or $600 billion) in additional loans to mid-sized businesses. The special purpose entity created by the Federal Reserve will purchase a 95% participation in eligible loans from lenders on a parri passu basis, and each lender will retain a 5% participation.
The Main Street “New” Loan Facility applies to new loans originated on or after April 8, 2020. The Main Street “Expanded” Loan Facility applies to existing loans that were originated before April 8, 2020, and which are “upsized” with funds available under the new facility.
The following is a summary of the term sheets for both programs circulated by the Federal Reserve yesterday. The Federal Reserve and the Treasury Department may make adjustments to the terms and conditions published yesterday. It is also important to note that borrowers may not participate in both of the new facilities. Additionally, borrowers under either facility may not also participate in the Primary Market Corporate Credit Facility. It is permissible for borrowers to participate in both the Paycheck Protection Program and the Main Street Lending Program.
Main Street New Loan Facility
- Eligible Borrowers
U.S. businesses with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues.
- Loan Terms
Unsecured term loans made by lenders to borrowers on the following terms:
- Four-year maturity;
- Amortization of principal and interest deferred for one year;
- Interest accrues at the Secured Overnight Financing Rate (currently 0.01%), plus 2.5% to 4.0%;
- $1 million minimum loan size;
- Maximum loan size is the lesser of $25 million, or 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; and
- Prepayment is permitted without penalty.
- Required Attestations
- The lender must attest that the loan will not be used to repay or refinance pre-existing loans made by the lender to the borrower.
- The borrower must not use the loan proceeds to pay other loan balances and must commit to refrain from repaying other debt of equal or lower priority (except for mandatory principal payments), unless the borrower first repays the loan in full.
- The lender cannot cancel or reduce existing lines of credit with the borrower, and the borrower cannot seek to cancel or reduce its outstanding lines of credit with the lender making the new loan (or any other lender).
- The borrower must attest that it requires financing due to the exigent circumstances of COVID-19, and that using the proceeds of the loan will make reasonable efforts to maintain its payroll and retain its employees during the loan term.
- The borrower must attest that it meets the EBITDA leverage condition referenced above.
- The borrower must attest that it will follow the compensation, stock repurchase and capital distribution restrictions specified in Section 4003 of the CARES Act.
- The lender and borrower must each certify that they are eligible to participate in the facility under the terms of applicable law.
- Facility Fee
The lender pays the special purpose entity created by the Federal Reserve a facility fee of 1.0% of the principal amount of the loan. The lender may require the borrower to pay this fee.
- Loan Origination and Servicing
The borrower pays the lender an origination fee of 1.0% of the principal amount of the loan. The Federal Reserve’s special purpose entity will pay the lender 0.25% of the principal amount of its participation in the loan per annum for loan servicing.
- Facility Termination
The Federal Reserve’s special purpose entity will cease purchasing participations in loans on September 30, 2020, unless the program is extended. The Federal Reserve will continue to fund the special purpose entity until the special purpose entity’s assets mature or are sold.
Main Street Expanded Loan Facility
As noted above, the “Expanded” Loan Facility applies only to loans that were originated prior to April 8, 2020. However, the terms are substantially similar to the terms of the “New” Loan Facility described above, subject to the following key differences:
- Maximum Loan Size
Maximum loan size is the lesser of:
- $150 million,
- 30% of the borrower’s existing outstanding and committed but undrawn bank debt, not to exceed four times the borrower’s 2019 EBITDA, or
- 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.
- Loan Participation
The Federal Reserve will purchase a 95% participation in the upsized tranche of the loan at par value. Any collateral securing the loan (whether the collateral was pledged when the loan was previously originated or at the time of upsizing) will secure the loan participation on a pro rata basis.
- Facility Fee
The lender is not required to pay the special purpose entity created by the Federal Reserve a facility fee.
CARES Act Section 4003 Restrictions
It is important to note that loans made under the “New” Loan Facility and the “Expanded” Loan Facility will subject the borrower to numerous restrictions and prohibitions under Section 4003 of the CARES Act. The prohibitions regarding stock buybacks provide, among other things, that for 12 months after the loan is no longer outstanding, the borrower cannot pay dividends or repurchase an equity security of the borrower or any parent company of the borrower that is listed on a national securities exchange (excluding pursuant to any contractual obligations incurred before the enactment of the CARES Act). While the term sheets published yesterday do not expressly address how the restrictions would apply to a closely held business, Section 4003 may also restrict equity redemptions and buy-backs in a closely held business unless the shareholders’ agreement, operating agreement or other applicable contract was signed before the enactment of the CARES Act.
Bradley will continue to monitor developments and guidance under the new Main Street Lending Program.