The U.S. Department of the Treasury (“Treasury”) and the Board of Governors of the Federal Reserve System (the “Federal Reserve”) last week provided key guidance regarding the Main Street Lending Program (the “Program”), a Federal Reserve lending program contemplated by the Coronavirus, Aid, Relief, and Economic Security Act (the “CARES Act”). While the guidance outlines major components of the Program, it leaves many questions unanswered and states that further guidance is forthcoming.
We tailored the questions and answers below to businesses seeking loans under the Program. They give an overview of the Program and the key terms of loans made under it, but they generally do not address issues raised by the proposed key terms for Program loans (e.g., issues relating to calculating earnings before interest, taxes, depreciation and amortization for purposes of determining the maximum size of a Program loan).
We continue to monitor Treasury and Federal Reserve publications and pronouncements, because we expect new information to be released soon.
1. What is the Federal Reserve’s Main Street Lending Program?
The Program is a brand-new, multi-facility lending program created by the Federal Reserve to help small and mid-sized businesses that need access to cash because of the COVID-19 pandemic. The Program is described in the CARES Act, a $2 trillion stimulus package signed into law on March 27, 2020.
2. How much money is available for loans the Program?
“Up to” $600 billion will be available under the Program, the Federal Reserve said, but it has not specified a more precise amount. It is unclear if the aggregate amount of Program loans will be capped at $600 billion or if $600 billion is the maximum amount of participations a Treasury-sponsored special purpose vehicle (the “SPV”) (further described in Question #9 below) will purchase under the Program. The latter measure would make an additional amount of approximately $3 billion available for loans under the Program.
3. When does the Program begin and end?
Federal Reserve announced some Program details on April 9, 2020, but has not announced when the Program will formally begin. The program is currently scheduled to end September 30, 2020.1
4. Is more guidance about the Program expected?
Yes. Treasury and the Federal Reserve are still finalizing the Program and accepted comments on the Program through the Federal Reserve’s website until April 16, 2020. We expect more guidance based on those comments, among other things. Post-CARES Act guidance available to date is limited: the Federal Reserve has released two term sheets (both of which expressly note that Program terms are subject to change) and some press releases. We expect some answers in this Q&A will be affected by the new guidance.
5. Who is generally eligible to obtain loans under the Program?
To be eligible to obtain a Program loan, a prospective borrower must meet all of following criteria:
- It must be a business;
- It employs up to 10,000 employees (but not more) or it has up to $2.5 billion in 2019 annual revenues (but not more);
- It 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.;
- It must have been “in good financial standing” before the COVID-19 pandemic; and
- It is not participating in the Primary Market Corporate Credit Facility.
The Federal Reserve has said that a borrower who has applied for or received a loan under the CARES Act’s Paycheck Protection Program (the “PPP”) may receive a Program loan (assuming the borrower is otherwise eligible).
6. Will employees or revenues of a prospective borrower’s affiliates count toward the employee or revenue-based eligibility standard in the previous answer?
The Federal Reserve has not provided guidance on this question. But we expect some affiliation rules will apply; otherwise, it appears that even U.S.-based operating subsidiaries of large, ex-U.S. multinational corporations, for example, could conceivably be eligible for Program loans.
7. Are private equity or venture capital-backed companies eligible to obtain Program loans?
Probably. Due to the size standards applicable to the Program, which are far more generous than those applicable to the small business-focused PPP, we expect many private equity and venture capital-backed companies will be eligible borrowers under the Program.
However, while the media and the private equity and venture capital communities have suggested the Program is open to portfolio companies excluded from participating in the PPP, many such companies’ eligibility likely depends on whether and what affiliation rules apply to the Program. Still, because the Program has high size standards, many portfolio companies should be eligible borrowers even if a future affiliation rule requires that the employees or revenues of their affiliates be counted for purposes of applying such size standards.
8. Who makes loans under the Program?
Banks that qualify as “eligible lenders” will make loans under the Program, rather than the Federal Reserve or Treasury, just as financial institutions, rather than the U.S. Small Business Administration, are making potentially forgivable loans under the PPP. “Eligible lenders” for purposes of the Program are U.S.-insured depository institutions, U.S. bank holding companies and U.S. savings and loan holding companies.
For more information about the PPP, see our article “Questions and Answers Regarding the CARES Act PPP Loan.”
9. How will the Program encourage lenders to make Program loans—will Treasury or the Federal Reserve purchase Program loans from lenders?
No, neither Treasury nor the Federal Reserve will directly purchase Program loans. But the Program will encourage banks to lend because the SPV (funded by Treasury and the Federal Reserve as described below) will purchase 95% participations in Program loans at par value, while participating lenders must retain 5% of Program loans and will be subject to Federal Reserve oversight to ensure prudent lending practices. The SPV and eligible lenders will share risk with respect to Program loans on a pari passu basis.
10. How will the SPV fund its purchase of participations in Program loans?
The SPV’s purchases will be funded by recourse loans from the Federal Reserve and a $75 billion equity capital investment from Treasury.
11. What loan facilities are available under the Program?
The program includes two loan facilities: (i) the Main Street New Loan Facility (the “New Loan Facility”), which is intended to facilitate new loans to businesses; and (ii) the Main Street Expanded Loan Facility (the “Expansion Facility”), which is intended to facilitate the expansion of existing loan facilities to businesses.
12. What are the key terms of Program loans made under the New Loan Facility?2
A Program loan made under the New Loan Facility must be/have:
- A term loan made by an eligible lender to an eligible borrower;
- Originated on or after April 8, 2020;
- Unsecured;
- A 4-year maturity;
- A deferral of payments of principal and interest for one year;
- An adjustable interest rate of the Secured Overnight Financing Rate plus 250-400 basis points;
- No less than $1 million;
- No prepayment penalty; and
- Less than the lower of (i) $25 million or (ii) an amount that, when added to the eligible borrower’s existing outstanding and committed but undrawn debt, does not exceed four times the borrower’s 2019 earnings before interest, taxes, depreciation and amortization (“EBITDA”).
These terms, and the terms applicable to Expansion Facility loans (described below), do not cover a number of key points that we expect will be addressed in later guidance.
13. What are the key terms of Program loans made under the Expansion Facility?3
A Program loan made under the Expansion Facility (i.e., the upsized portion of an existing loan) must have the same terms as a loan made under the New Loan Facility, except:
- The Expansion Facility loan must be an addition to an existing term loan made by an eligible lender to an eligible borrower;
- The existing term loan must have been originated before, and the Expansion Facility loan must be originated after, April 8, 2020;
- The existing term loan and the Expansion Facility loan may be secured or unsecured (with any collateral to secure the SPV’s participation on a pro rata basis); and
- The maximum amount of an Expansion Facility loan is the lowest of (i) $150 million, (ii) 30% of the eligible borrower’s existing outstanding and committed but undrawn bank debt or (iii) an amount that, when added to the eligible borrower’s existing outstanding and committed but undrawn debt, does not exceed six times the eligible borrower’s 2019 EBITDA.
14. Can a borrower obtain a Program loan under the New Loan Facility and the Expansion Facility?
No, a borrower may only obtain a Program loan under one facility. Borrowers who are eligible to obtain a loan under either facility should carefully consider a variety of factors to pick the appropriate facility. In particular, they should consider the amount they would be permitted to borrow under each facility and the fact that collateral may be required for a loan made under the Expansion Facility.
15. Are Program loans potentially forgivable, like PPP loans?
No, while interest and principal payments on Program loans and PPP loans are deferred for specified periods, Program loans are not forgivable.
16. Do borrowers have to pay any fees for Program loans?
Yes, the amount of the fees depends in part on the facility under which a Program loan is made:
- Expansion Facility loan: A borrower must pay its lender a fee equal to 100 basis points of the principal amount of such a loan.
- New Loan Facility loan: A borrower must pay its lender (a) an origination fee equal to 100 basis points of the principal amount of such a loan and (b) if passed through to the borrower by lender, a facility fee of 100 basis points of the principal amount of the loan participation the SPV purchases (which should be five percent of the loan’s principal amount).
17. Does a prospective borrower have to make any certifications or attestations to obtain a Program loan?4
Yes, a prospective borrower must attest (among potentially other items) that it:
- Will not use the proceeds of Program loans to repay other loan balances;
- Will not repay other debt of equal or lower priority, with the exception of mandatory principal payments, unless the borrower has first repaid the Program loan in full;
- Will not to seek to cancel or reduce any of its outstanding lines of credit;
- Requires financing due to the exigent circumstances presented by the COVID-19 pandemic, and that, using the proceeds of the Program loan, it will make reasonable efforts to maintain its payroll and retain its employees during the term of such Program loan;
- Meets the EBITDA leverage limit described in the answer to Question 12 or 13, as applicable; and
- Will comply with the executive compensation, equity repurchase and capital distribution restrictions (all of which are further described below) that apply to direct loan programs under the CARES Act; and
- Is eligible to receive a Program loan, including in view of the CARES Act’s conflict of interest prohibition (which generally prohibits prospective borrowers in which high-ranking government officials have a 20% or more equity interest from receiving a Program loan).
18. What are the compensation, distribution and stock repurchase restrictions referred to the answer above?
- Equity Repurchase Restrictions: For a period that begins, presumably, when a Program loan is disbursed and ends 12 months after it has been repaid (the “Restricted Period”), a borrower may not repurchase any equity securities of the borrower (or the borrower’s parent) if such securities are listed on a national securities exchange, except to the extent required under a contractual obligation that is in effect as of March 27, 2020.
- Distribution Restrictions: During the Restricted Period, a borrower may not pay dividends or make other capital distributions with respect to its common stock. Prospective borrowers should pay particular attention to this restriction. We expect further guidance will extend this restriction to equity interests other than common stock.
- Employee Compensation Restrictions: During the Restricted Period (beginning, for this purpose, when the applicable loan agreement is signed), a borrower may not pay more than specified levels of “total compensation” (including salary, bonuses, awards of stock and other financial benefits provided to a borrower employee) to some highly compensated employees:
- An employee/officer whose calendar year 2019 total compensation (“2019 comp”) exceeded $425,0005 may not receive during the Restricted Period (a) more than his or her 2019 comp (during any consecutive 12-month period during the Restricted Period); or (b) severance pay or other termination benefits of more than twice such 2019 comp.
- An employee/officer whose 2019 comp exceeded $3 million may not receive (during any consecutive 12-month period during the Restricted Period) total compensation in excess $3 million, plus 50% of his or her 2019 comp in excess of $3 million.
Prospective borrowers should review their employment agreements to confirm that they can comply with these restrictions without breaching those agreements and may need to seek waivers under, or amendments of, such agreements.
[1] This is the date the SPV is currently scheduled to stop purchasing participations (a process further described below) in Program loans.
[2] Technically, the above-described terms are those required for the loan to be eligible for the SPV’s purchase of a participation in the loan.
[3] Technically, the above-described terms are those required for the loan to be eligible for the SPV’s purchase of a participation in the loan.
[4] Lenders are also required to make attestations.
[5] Excluded from the limitations in the bullet above are officers or employees who received total compensation in excess of that amount if their compensation is determined through a collective bargaining agreement entered into before March 1, 2020.
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