On April 30, the Federal Reserve announced it is expanding the scope of the Main Street Lending Program and the number of businesses eligible for it. The Fed also updated the program’s initial term sheets issued on April 9 and provided additional details.
The updates to the program and the initial term sheets were developed based on input the Fed and Treasury Department received during a public comment period that ended on April 16. While not yet operational, the federal government is working to create the infrastructure to make the program available for eligible lenders and borrowers.
Loan Options
Under the revised Main Street Lending Program, the Fed will now offer three loan facilities to eligible borrowers: (1) a new loan lending facility to make new term loans, (2) a priority loan lending facility to make new term loans, and (3) an expanded/upsized loan facility to make term loans to upsize or increase existing term loans or revolving credit facilities between the eligible borrower and eligible lender.
The revised program continues to permit businesses that received relief under the Paycheck Protection Program to remain eligible for this too, so long as other conditions are met. However, borrowers may only receive one of the three facilities set forth above.
Lender Options
Once the program is operational, small and medium-sized businesses can apply for the loans from an eligible lender. Interested borrowers should reach out to their banker and discuss the bank’s requirements for the program.
Underwriting Requirements
The announcement from the Fed noted that while EBITDA is the key underwriting metric for determining eligibility under the program, the Fed understands that EBITDA is generally not used by asset-based borrowers. In light of that, the Fed will consider adjusting the loan eligibility metrics for such asset-based borrowers, in addition to nonprofits.
Notable changes to the program include the following:
- Proposed creation of a priority lending facility, in addition to the previously proposed new lending facility and expanded lending facility.
- Businesses with up to (i) 15,000 employees or (ii) $5 billion in revenue in 2019 are eligible under the program, so long as other conditions are met (maximum was previously 10,000 employees or $2.5 billion in revenue).
- Applies SBA rules related to affiliates for purposes of determining eligibility (a business must aggregate the number of its employees and 2019 revenue with that of its affiliates in order to determine whether it is eligible under the above-referenced thresholds).
- Makes eligibility consistent with the Paycheck Protection Program (a full list of “ineligible businesses” can be found at 13 CFR 120.110(b)-(j), (m)-(s)).
- Reduces minimum loan amount to $500,000 for new and priority loans (minimum was previously $1 million).
- Benchmark reference rate will be LIBOR (previously was SOFR) and spread will be 300 basis points (spread was previously 250 to 400 basis points).
- Borrowers must certify, among other certifications and covenants, that it has a reasonable basis to believe that (after giving effect to the loan), it has the ability to meet its financial obligations for no less than the next 90 days and does not expect to file bankruptcy.
- Lenders must conduct an assessment of each potential borrower’s financial situation, and if any potential borrower had loans outstanding with a lender as of December 31, 2019, then such loans must have had an internal risk rating equivalent to a “pass” in the Federal Financial Institutions Examination Council’s rating system as of such date.
- Lenders must apply their own independent underwriting standards to determine the creditworthiness of a borrower (i.e., the requirements and guidelines in the updated term sheets are minimum requirements, not automatic qualifications for a borrower to participate).
All of the current materials can be found on the Fed's website, including the updated term sheets and an exhaustive FAQ resource.
Main Street Lending Terms & Conditions
Below is an overview of some of the most pertinent terms and conditions of each applicable loan facility in the program (as of April 30):
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Main Street Business Lending Program Facilities
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New Loan Facility
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Priority Loan Facility
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Expanded Loan Facility
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Loan Origination Date
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After April 24, 2020
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On or before April 24, 2020 (and have a remaining term of at least 18 months, taking into account any adjustments made to the maturity of the loan after April 24, 2020, including at the time of upsizing)
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Loan Term
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4 years
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Risk Retention for Eligible Lenders
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5%
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15%
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5%
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Retention Period for Eligible Lenders
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Lender must retain its percentage of the loan until it matures or the Federal Reserve sells all of its participation, whichever comes first
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Lender must retain its percentage of the expanded loan until the expanded loan matures or the Federal Reserve sells all of its participation, whichever comes first
Lender must also retain its interest in the underlying loan until the underlying loan matures, the upsized loan matures or the Federal Reserve sells all of its participation interest, whichever comes first
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Security
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Secured or unsecured
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If underlying loan is secured, then expanded loan is secured pari passu with underlying loan
If underlying loan is unsecured, then expanded loan is unsecured
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Minimum Loan Size
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$500,000.00
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$10,000,000.00
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Maximum Loan Size
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The lesser of (i) $25 million or (ii) an amount that, when added to outstanding and undrawn available debt, does not exceed four times adjusted 2019 EBITDA
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The lesser of (i) $25 million or (ii) an amount that, when added to outstanding and undrawn available debt, does not exceed six times adjusted 2019 EBITDA
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The lesser of (i) $200 million, (ii) 35% of existing outstanding and undrawn available debt, or (iii) an amount that, when added to outstanding and undrawn available debt, does not exceed six times adjusted 2019 EBITDA
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Interest Rate
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LIBOR + 3%
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Repayment
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Year 1: all principal and interest deferred (deferred interest will be capitalized)
Years 2-4: 33.33% each year
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Year 1: all principal and interest deferred (deferred interest will be capitalized)
Years 2-4: 15%, 15%, 70%
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Early Prepayment
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Early prepayment permitted without penalty or fee
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Restrictions on payment of other debt
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Loan proceeds may not be used to refinance other debt
Borrower only allowed to pay required interest and principal payments of other debt while loan is outstanding (other than repayments of lines of credit in accordance with the borrower’s normal course of business for usage of such line of credit)
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At loan origination, loan proceeds may be used to refinance existing debt owed by the borrower to a lender (so long as the lender being paid off is not the lender making the eligible loan)
Borrower only allowed to pay required interest and principal payments of other debt while loan is outstanding (other than repayments of lines of credit in accordance with the borrower’s normal course of business for usage of such line of credit)
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Loan proceeds may not be used to refinance other debt
Borrower only allowed to pay required interest and principal payments of other debt while loan is outstanding (other than repayments of lines of credit in accordance with the borrower’s normal course of business for usage of such line of credit)
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Eligible Lenders
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A U.S. federally insured depository institution (including a bank, savings association or credit union), U.S. branch or agency of a foreign bank, U.S. bank holding company, U.S. savings and loan holding company, U.S. intermediate holding company of a foreign banking organization or U.S. subsidiary of any of the foregoing
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Eligible Borrowers
(meets each of the following criteria)
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-
Satisfies at least one of the following two conditions: (i) has 15,000 or fewer employees, or (ii) had 2019 annual revenue of $5 billion or less [Note: SBA affiliation rules apply for purpose of making this determination];
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Other Loans between Borrower and Lender
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If a borrower has any loans outstanding with the lender as of December 31, 2019, then such other loans must have had an internal risk rating equivalent to a “pass” in the Federal Financial Institutions Examination Council’s rating system as of such date
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Compensation, Stock Repurchase, and Capital Distribution Restrictions
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Borrower must follow compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under Section 4003(c)(3)(A)(ii) of the CARES Act for the term of the loan and for 12 months after loan is paid in full
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Employee retention
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Each borrower should make commercially reasonable efforts to maintain its payroll and retain its employees during the time the eligible loan is outstanding
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Loan Fees
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Origination fee: up to 100 basis points of loan amount
Transaction fee: 100 basis points on loan amount (paid from lender to Federal Reserve, but may be passed through to borrower)
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Origination fee: up to 75 basis points of expanded loan amount
Transaction fee: 75 basis points on loan amount (paid from lender to Federal Reserve, but may be passed through to borrower)
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Servicing Fee
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25 basis points of participated loan amount (paid from Federal Reserve to lender)
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Other Notable Loan Features
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Facility Termination Date
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Federal Reserve will cease purchasing participations on September 30, 2020 (unless otherwise extended)
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Loan Documentation
The Fed will issue a form loan participation agreement, form borrower and lender certifications, and other form agreements required to implement the program in accordance with the term sheets, once finalized. The Fed will not provide form loan documents, as these will be provided by the eligible lenders. Eligible lenders should take precaution to make sure its loan documents include all of the terms of the program required by the Fed.
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