Federal Reserve Offers Lending Program for Small and Medium-Size Businesses

Hannah E. Mudd

By Hannah E. Mudd

The Federal Reserve announced on April 9, 2020 that it has established a $600 billion lending program focused on aiding small and medium-size businesses who were in good financial standing prior to the onset of the COVID-19 crisis. This program will enable the purchase of qualifying loans from lenders lending to U.S. businesses with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues. Additionally, it looks like firms who have taken advantage of the SBA Paycheck Protection Program will be eligible to participate in this program as well.

The Federal Reserve’s Main Street Lending Program will operate through two facilities: the Main Street New Loan Facility (MSNLF) and the Main Street Expanded Loan Facility (MSELF). Eligible lenders may originate new loans (under MSNLF) or increase the size of (“upsize”) existing loan/tranches (under MSELF) made to eligible businesses. The program is not operational at this time, but the comment period just closed on April 16, 2020. Accordingly, we can expect the program to start and have an application available soon.

The MSNLF will purchase participations in eligible loans originated by lenders on or after April 8, 2020. The MSELF will purchase upsized tranches or loans originated by lenders before April 8, 2020 that meet specific eligibility criteria. In either case, the purchases will be on a risk-shared basis with the lender retaining 5% of the loans and the relevant facility purchasing 95% participation in the loans originated by eligible lenders. This 95% purchased participation will be through a single special purpose vehicle on a recourse basis as set up by a Reserve Bank branch.

We will first discuss the borrower, lender, asset, and entity eligibility requirements that are the same across both facilities before delving into the facility-specific issues.

Common Requirements

Eligible lenders include U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies (“lenders”). While eligible borrowers are businesses with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues. Borrowers must be a business created or organized in the United States or under the laws of the United States with significant operations in, and most of its employees based in, the United States. Borrowers who participate in program may not also participate the Primary Market Corporate Credit Facility as established by the Federal Reserve.

Eligible loans are unsecured term loans made by a lender(s) to a borrower that has:

  1. A 4-year maturity;
  2. Deferral of principal and interest during the first year of the loan’s term;
  3. An interest rate of 250-400 basis points over SOFR (secured overnight financing rate);
  4. A minimum loan size of $1 million; and
  5. Allows prepayment without penalty.

There is a sixth requirement for eligible loans that is dependent on whether it will be through the MSNLF or MSELF. This last requirement is listed below under the relevant program.

A Federal Reserve branch will create a single special purpose vehicle(“SPV”) on a recourse basis through which they will purchase the participations. The SPV will purchase a 95% participation in a loan at par value, and the lender will retain 5% of the loan.

In addition to any standard certifications, specific certifications will be required with any loan:

  • Lenders must certify that proceeds of the loan will not be used to re-pay or refinance pre-existing loans or lines of credit made by the lender to the borrower.
  • Lenders must agree to not cancel or reduce any existing lines of credit outstanding to the borrower.
  • Both lenders and borrowers will certify that they are eligible to participate in the program, including the conflicts of interest prohibition in section 4019(b) of the CARES Act.
  • Borrowers must certify they will refrain from using the proceeds of the loan to re-pay other loan balances.
  • Borrowers must also refrain from repaying other debt of equal or lower priority, except for mandatory principal payments, unless they have already repaid the loan in full. Borrowers must agree to not seek to cancel or reduce any of its outstanding lines of credit with their lender, or any other lender.
  • Borrowers must also acknowledge they require financing due to the circumstances presented by the COVID-19 pandemic, and that they will make reasonable efforts to maintain payroll and retain employees during the term of the loan using the loan’s proceeds.
  • Borrowers must also attest that it meets the EBITDA leverage condition as one of the required features of loans. Borrowers must certify they will follow compensation, stock repurchase, and dividend and capital distribution restrictions that exist under other sections of the CARES Act in order to take advantage of the program.

The purpose of these expanded certifications is to serve as a compliance tool. They also ensure that borrowers are prohibited from buying back certain equities (except those under a pre-existing contract), paying dividends, or making other capital distributions regarding common stock until 12 months after the loan is repaid. Borrowers are also required, as feasible, to maintain employment at the March 24, 2020 level until September 30, 2020 and, in any case, not to reduce employment by more than 10%. The relevant CARES Act compensation restrictions prohibit pay increases to those who already receive more than a certain salary threshold and caps severance payment levels. These compensation restrictions remain in effect for 12 months after the loan is repaid as well.

The SPV will cease purchasing participations in MSNLF and MSELF loans on September 30, 2020, unless the Federal Reserve Board and the Treasury Department extend the program. The Reserve Bank will continue to fund the SPV after such date until the SPV’s underlying assets mature or are sold.

Main Street New Loan Facility

An MSNLF loan will be originated on or after April 8, 2020 by a lender to a borrower. If the assets will be purchased through MSNLF the maximum size limit on the loan will be the lesser of $25 million or a loan amount that results in a four times debt-to-EBITDA ratio based on the borrower’s existing outstanding and committed, but undrawn, debt and its 2019 EBITDA.

The lender will pay the SPV a facility fee of 100 basis points of the principal amount of the loan participation purchased by the SPV. The lender may require the borrower to pay this fee. A borrower will pay the lender an origination fee of 100 basis points of the principal amount of the loan. The SPV will in turn pay the lender 25 basis points of the principal amount of its participation in the loan per annum as a loan servicing fee. The SPV and the lender will share risk on a pari passu basis.

Main Street Expanded Loan Facility

Loans increased under MSELF must have originated before April 8, 2020. If the assets will be purchased through MSELF the maximum size limit on the loan/tranche will be the lesser of $150 million, 30% of the borrower’s outstanding and committed but undrawn bank debt, or the loan amount that results in a six times debt-to-EBITDA ratio based on the borrower’s existing outstanding and committed but undrawn debt and its 2019 EBITDA.

As MSELF will purchase secured loans originating prior to the program, there will be no charge representing a facility fee. Collateral that secures the loan, including collateral pledged under the original loan or at the time of upsizing, will secure the loan participation on a pro rata basis. Borrowers under the MSELF are charged a 100 basis point upsize fee assessed on the principal amount of the upsized tranche. The facility will pay a 25 basis point annual servicing fee to the lender based on the participation amount in the upsized tranche.

The efforts by the Federal Reserve, including the enactment of the Main Street Loan Program, will provide crucial liquidity to businesses at this critical point in time.

For additional COVID-19 related information, go to our Coronavirus/COVID-19 Resource Center.

Posted by Attorney Hannah E. Mudd. Mudd is a member of Danna McKitrick’s transaction team. As a member of the team she advises clients on a variety of corporate and business transactions including entrepreneurial, real estate, banking, employment, and corporate formation and governance matters.


Comments are closed.