April 9, 2020

Today (Thursday, April 9, 2020) the Federal Reserve announced the details of a new “Main Street Business Lending Program,” designed to supplement existing Small Business Administration (SBA) emergency lending programs such as the Paycheck Protection Program (PPP).  This program is part of a larger move by the Federal Reserve to provide up to $2.3 trillion in financing to support the economy during the coronavirus pandemic. 

Under the Main Street Lending Program, eligible lenders (defined as U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies) will offer 4-year unsecured loans to companies employing up to 10,000 workers or with revenues of less than $2.5 billion “that were in good financial standing before the [COVID-19] crisis.”  Eligible borrowers must also have “significant operations in and a majority of its employees based in the United States.” (Term Sheet: Main Street New Loan Program, https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200409a7.pdf.)

 According to the Federal Reserve’s press release summarizing the details of the program, principal and interest payments will be deferred for one year. Eligible banks may originate new Main Street loans or use Main Street loans to increase the size of existing loans to businesses. Banks will retain a 5 percent share, selling the remaining 95 percent to the Federal Reserve’s Main Street credit facility, which will purchase up to $600 billion of loans. Firms seeking Main Street loans must commit to make reasonable efforts to maintain payroll and retain workers. Borrowers must also follow compensation, stock repurchase, and dividend restrictions that apply to direct loan programs under the CARES Act. Firms that have taken advantage of the PPP may also take out Main Street loans.

The terms of new Main Street loans are as follows:

  • 4 year maturity;
  • Amortization of principal and interest deferred for one year;
  • Adjustable interest rate, calculated at the Federal Reserve’s Secure Overnight Financing Rate (currently 0.01%) plus 250-400 basis points (i.e., a total interest rate of 2.51-4.01%);
  • Minimum loan size of $1 million;
  • Maximum loan size that is the lesser of (i) $25 million or (ii) an amount when, added to the borrowers’ existing “outstanding and committed but undrawn debt,” [i.e., available lines of credit are included] does not exceed four times the borrower’s 2019 earnings before interest, taxes, depreciation and amortization (EBITDA); and
  • Prepayment permitted without penalty.

The terms for Main Street loans that increase the size of a bank’s existing loan to a business are similar, except the maximum loan amount is the lesser of (i) $150 million, (ii) 30% of the borrower’s outstanding bank debt, or (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 EBITDA.  Term sheets for new and existing loans are available at the Federal Reserve’s website at https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200409a7.pdf and https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200409a4.pdf, respectively.

The lender and borrower must commit that the proceeds of a Main Street loan will not be used to repay other loan balances.  Borrowers must further commit to refrain from repaying other debt of equal or lower priority to a Main Street loan, except for mandatory principal payments, until the Main Street loan has been repaid in full.

Borrowers must attest that they require financing due to “exigent circumstances” presented by the COVID-19 pandemic, and that, using the proceeds of the Main Street loan, they will make “reasonable efforts” to maintain their payroll and retain their employees.  They must also attest they will follow the same restrictions on compensation, stock repurchase, and capital distribution as apply under emergency lending programs established by the previous CARES Act.

The Federal Reserve intends to purchase up to $600 billion in loans originated through the Main Street Lending Program through September 30, 2020.  This is a significant increase over and in addition to the $350 billion previously made available through the SBA’s PPP program, which appears likely to be quickly exhausted by an ongoing rush of applications for that relief. 

Significant differences between the Main Street Lending Program and the existing PPP program are that PPP loans may be entitled to partial or total loan forgiveness, while Main Street loans are not.  PPP loans are due (if not forgiven) in two years, as opposed to four under the Main Street Lending Program.  Repayment of Main Street loans are also deferred for a longer period (one year, as opposed to six months under the PPP).  Possibly most significantly, Main Street loans have fewer restrictions on what business expenses loan funds may be used for.  The PPP has a requirement that a borrower certify that loan funds received under that program will be used for payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities.  Some prospective PPP borrowers whose labor costs are a relatively small part of their overall costs have perceived that the PPP’s limitations on eligible uses of loan funds limit the program’s usefulness to them.  The Main Street Lending Program, which appears at this point to have fewer such restrictions, may help fill the gap in which these relatively less labor-intensive companies fell under the PPP.

The Main Street Lending Program is still being finalized, so it is not yet clear when applications may first be submitted, although that is likely imminent.  The Federal Reserve is accepting comments from lenders, borrowers and other stakeholders until April 16.

Author: Thomas J. Eastmond, Associate, Enterprise Counsel Group