By now, with businesses and individuals being in some form of quarantine for over three months, most businesses have heard of COVID-19-related emergency lending programs from the Federal Government such as the Economic Injury Disaster Loan (“EIDL”) program or the Paycheck Protection Program loans created under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). Recently, the Federal Reserve initiated a new commercial lending facility that has been promised for months, the Main Street Lending Program (“MSLP”), consisting of three new loan facilities: the New Loan Facility, Expanded Loan Facility, and Priority Loan Facility. According to the Federal Reserve, it “established the [MSLP] to support lending to small and medium-sized businesses that were in sound financial condition before the onset of the COVID-19 pandemic.” The MSLP is aimed at borrowers who, during or following the pandemic and its economic effects, are having a harder time accessing new credit.
The MSLP creates a special purpose vehicle, funded by the Federal Reserve (and, to a lesser extent, the Treasury). When a lender makes a loan under the program, it submits loan participation information to the special purpose vehicle, which then purchases 95% of the new loan, leaving the lender with the remaining 5%. These new loan facilities are open to borrowers who have previously obtained EIDL or PPP loans.
There are a few basic terms that apply to all loans made in the program:
- Five year maturity;
- Interest rates are LIBOR (1 or 3 month) plus 500 basis points;
- Principal payments are deferred for two years and interest payments are deferred for one year, although unpaid interest is capitalized; and
- No prepayment penalty.
Borrowers must meet certain criteria, including:
- Being established prior to March 13, 2020;
- Not an Ineligible Business (under SBA rules);
- Either (a) have 15,000 or fewer employees, or (b) had $5 billion or less in 2019 annual revenues;
- Be created or organized, have significant operations and have a majority of its employees based in the United States; and
- Not have received specific relief from the CARES Act (other than EIDL or PPP loans).
Specific, but common-sense rules apply to determine the number of employees (employees of affiliates count); revenue (GAAP-based audited financials or revenues reported to the IRS); “significant operations;” and “majority of employees” requirements. While the loan is outstanding, borrowers have to make certain attestations, use commercially reasonable efforts to maintain employees and payroll, and (generally) cannot engage in stock buybacks, pay dividends, make capital distributions (with very large exceptions), or pay executive bonuses.
To make loans under the MSLP, a lender must be an Eligible Lender, which means a:
- US federally insured depository institution (including banks, savings associations, or credit unions);
- US branch or agency of a foreign bank;
- US bank holding company;
- US savings and loan holding company;
- US intermediate holding company of a foreign banking organization; or
- US subsidiary of any of the foregoing.
Eligible Lenders may originate new MSLP loans or use MSLP loans to increase the size of existing loans to eligible businesses, and may apply their own underwriting standards in evaluating a borrower’s eligibility. Loans under each of the New Loan Facility, Expanded Loan Facility, and Priority Loan Facility have different minimum and maximum term principal amounts permissible and may be secured or unsecured. Although the rules are a little different for each of the three facilities, if secured, generally, the MSLP loan must be not subordinate to unsecured indebtedness or other secured loans (other than mortgage loans and equipment financings). Priority Loan Facility loans (minimum term loan size of $250,000; maximum amount of $50,000,000.00, or six times the borrower’s adjusted 2019 EBITDA) are expressly permitted to be used by a borrower to refinance existing debt owed to a lender that is not an Eligible Lender. There are some other rules—such as payment and security priority (including between term and revolver tranches), collateral coverage ratios for some loans, language for use in multi-lender facilities, and cross-default/cross-acceleration provisions—that are detailed enough to fall outside of this client alert. But Eligible Lenders are generally able to use their own loan documentation and charge most of the same fees that are charged in commercial industrial loans.
For now, lender interest in the MSLP has been tepid. But as borrowers continue to experience decreases in revenue, as the terms and conditions of the program become more familiar to lenders, and as lenders seek ways to serve existing customers with new loans while paring off risk, we anticipate that the MSLP will eventually become another useful tool to fight against COVID-19’s effects on commercial lending markets.