On April 9, 2020, the Federal Reserve announced a series of new programs under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) providing $2.3 trillion in loans to support the economy. The most anticipated of these was the Main Street Lending Program (Main Street Program), which allows small and midsized businesses to obtain loans from banks. On April 30, 2020, the Federal Reserve released new details on the Main Street Program after receiving more than 2,200 comments from individuals, businesses and nonprofits on the program’s initial terms. Key changes from the initial version include the creation of a third facility for more highly leveraged borrowers (in turn requiring a higher retention of risk by the lender), lowering the minimum loan size, adjusting the interest rate and expanding the pool of eligible borrowers. Several open questions from the initial program details were addressed in the updated term sheets and an accompanying FAQ.1
On May 27, 2020, the Federal Reserve issued an expanded FAQ that provided additional details on program implementation and addressed other matters, including lender and borrower eligibility, fees, EBITDA adjustments, participations and regulatory requirements. In addition to the updated FAQ, the Federal Reserve also provided a number of related form documents, including lender registration certifications and covenants, lender wire instructions required to become a Main Street Program lender, and borrower certifications and covenants required for participation in a Main Street loan facility.
On June 8, 2020, the Federal Reserve announced that it further modified the Main Street Lending Program to accommodate more small and medium-sized businesses seeking support. Key changes include lowering the minimum loan sizes, increasing the maximum loan sizes and extending payment terms. The program should be live for borrowers soon, as the Federal Reserve opened lender registration on June 15 and is encouraging lenders to begin making Main Street loans immediately after successfully registering.
The Main Street Program comprises three facilities – the Main Street New Loan Facility (New Loan), the Main Street Priority Loan Facility (Priority Loan) and the Main Street Expanded Loan Facility (Expanded Loan) – which collectively will provide up to $600 billion of loans. In short, businesses with up to 15,000 workers or revenues of less than $5 billion can borrow a four-year, low-interest term loan and defer principal and interest payments for the first year. However, key considerations include high upfront fees in addition to restrictions on dividend payments, distributions, stock buybacks and compensation for the life of the loan plus an additional 12 months. This article provides a summary of the New Loan, Priority Loan and Expanded Loan facilities as announced on April 9 and updated on April 30, May 27 and June 8, and also highlights several key considerations for potential borrowers.
Main Street Lending Program
The Main Street Lending Program offers borrowers three different facilities. While the facilities all carry the same eligible borrower and lender criteria, maturity, interest rate and payment deferral/prepayment features, the loan types differ in size requirements, size calculations, amortization schedule and seniority.
The New Loan and Priority Loan facilities are for loans originated after April 24, 2020, and provide unsecured or secured term debt ranging from $250,000 to $35 million under the New Loan facility and $50 million under the Priority Loan facility. The Expanded Loan facility upsizes an existing secured or unsecured term loan or revolving credit facility originated on or before April 24, 2020, and provides $10 million to $300 million of additional debt. Note that unlike the Paycheck Protection Program, these loans are not forgivable.
A newly formed special purpose vehicle (SPV) – funded by the Federal Reserve and a $75 billion investment from the Treasury – will purchase a 95% participation of loans made by lenders in facilities, and lenders will retain 5% of each loan. The SPV will stop purchasing participations in eligible loans on September 30, 2020, unless the program is extended.
Eligible lenders are U.S.-insured depository institutions, U.S. bank holding companies and U.S. savings and loan holding companies. Under an Expanded Loan, only one of the lenders in the existing facility that holds an interest in the underlying loan on the date of the upsizing needs to be an eligible lender under the Main Street Program.
Eligible borrowers are for-profit businesses that meet at least one of the following two conditions: 15,000 employers or fewer2 or $5 billion or less in 2019 annual revenue.3 The business must be created or organized in the U.S. or under the laws of the U.S., with significant operations in and a majority of its employees based in the U.S. Borrowers must attest that they are unable to secure adequate credit accommodations from other banking institutions because the amount, price or terms of credit available from other sources are inadequate for the borrower’s needs during the current unusual and exigent circumstances. Borrowers who received PPP loans are still eligible for a Main Street Program loan. For more guidance on ineligible businesses, see the CARES Act and the Small Business Administration’s Interim Final Rule.4
It is important to note that eligibility guidelines are general requirements for the Main Street Program. Lenders are expected to apply their own underwriting standards and will ultimately determine whether a borrower is approved for a loan.