Federal Reserve Launches Main Street Lending Program to Support Middle Market Businesses
The Federal Reserve’s Board of Governors has released details on the previously announced Main Street Lending Program aimed at businesses that are too large to qualify for the Small Business Administration’s Paycheck Protection Program or Economic Injury Disaster Loan Program, but that still need assistance as a result of the COVID-19 outbreak. The Federal Reserve will make a $75 billion equity investment in a special purpose vehicle (SPV), which will support two lending facilities. The Main Street New Loan Facility (MSNLF) is intended to help facilitate new loans to businesses, while the Main Street Expanded Loan Facility (MSELF) is intended to help facilitate the extension of already existing loans. Under each of the facilities, the SPV will purchase a 95% participation in loans from eligible lenders (i.e., U.S. insured depository institutions, U.S. bank holding companies and U.S. savings and loan holding companies), with the applicable lender retaining a 5% participation. Together, the two facilities will provide up to $600 billion in financing to U.S. businesses.
The Program is available to U.S.-based businesses with up to 10,000 employees or less than $2.5 billion in revenue in 2019. Borrowers must have been in good financial standing prior to the COVID-19 outbreak and must attest that they require financing due to the circumstances presented by the outbreak. Borrowers must also make reasonable efforts to maintain payroll and retain employees during the term of the loan, and must abide by the following stock repurchase, capital distribution and compensation restrictions for the term of the loan and twelve months thereafter:
- A borrower and its affiliates may not repurchase any equity securities of the borrower or its parent listed on a national securities exchange, except to the extent required by a contractual obligation in effect on or prior to March 27, 2020.
- Borrowers may not pay dividends or make other capital distributions with respect to their common stock.
- No officer or employee whose total 2019 compensation exceeded $425,000 may receive total compensation during any twelve consecutive months in excess of his or her 2019 compensation, nor may any officer or employee receive severance pay or other termination benefits exceeding twice his or her 2019 compensation. Additionally, no officer or employee whose total 2019 compensation exceeded $3 million may receive total compensation during any twelve consecutive months in excess of the sum of (i) $3 million and (ii) 50% of the total compensation received by that officer or employee in calendar year 2019 in excess of $3 million.
The key terms for loans to be made under the program are as follows:
- Loans under both facilities have a minimum amount of $1,000,000.
- Under the MSNLF, the maximum amount for new loans is the lesser of (i) $25 million and (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 (i.e., earnings before interest, tax, depreciation and amortization).
- Under the MSELF, the maximum loan size is the lesser of (i) $150 million, (ii) 30% of the borrower’s existing outstanding and committed but undrawn bank debt, and (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.
- The interest rate for loans under both facilities is an adjustable rate equal to the Secured Overnight Financing Rate plus 250-400 basis points.
- Loans under both facilities will have a four-year maturity with the amortization of principal and interest deferred for one year. Loans may also be prepaid without penalty.
- Loans under the MSNLF are unsecured term loans and do not require collateral. For loans under MSELF, any collateral securing an eligible loan, whether pledged under the original loan terms or at the time of upsizing, will secure the SPV’s and applicable lender’s respective loan participations on a pro rata basis.
Notably, a business may apply for a Main Street Lending Program loan even if it has also applied for loans under either the Paycheck Protection Program or Economic Injury Disaster Loan Program offered by the Small Business Administration. A borrower may not, however, participate in the Main Street Lending Program and the Federal Reserve’s Primary Market Corporate Credit Facility (for very large employers), nor may a borrower participate in both facilities under the Main Street Lending Program.
The Program is still being finalized and the Federal Reserve and U.S. Treasury Department are seeking input from lenders, borrowers and other stakeholders through April 16.
If you have any questions about whether or how these facilities may apply to your business, please contact Jason Navarino, Rich Lomuscio, Hannah Greendyk or any member of Riker Danzig’s Corporate Department.
Please visit Riker Danzig’s COVID-19 Resource Center to stay up to date on all related legal issues.