Armanino Blog

Main Street Lending Program: A New Path to Sustain Liquidity

April 14, 2020

Often overlooked in the PPP loan hysteria of the past two weeks has been Title IV, Section 4003 of the CARES Act, which outlined a $454 billion lending program to larger businesses than those in the PPP. The Treasury Department and Federal Reserve have now provided initial guidance on the loans that will be available under the Main Street Lending Program, though specific application details are not expected to be released until the public comment period ends on April 16. Significantly, the program is now expanded to up to $600 billion.

Like the PPP loans, applications for the Main Street Lending program will be made through banks. However, there are many significant differences between the two programs that we highlight below.

Highlights for the Borrower

There are two separate facilities being put in place: one for new loans made subsequent to April 8, 2020, and one for expanding loans already made prior to April 8, 2020. The two facilities combine for up to $600 billion of available funding.

Eligibility requirements under both facilities are identical:

  • Businesses and nonprofits with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues. Notably, current guidance does not establish a minimum size requirement, though the CARES Act initially specified a floor of 500 employees for eligibility.
  • Businesses must be created or organized in the United States or under the laws of the United States with significant operations in, and a majority of, employees based in the U.S. The term sheet from the Federal Reserve does not restrict or place limitations on foreign ownership of the U.S. entity, though all aspects of the program remain subject to change.
  • The recipient cannot have filed for bankruptcy.
  • Recipients must have incurred or will incur "covered losses" as a result of COVID-19, including reduced demand, unbudgeted medical expenses and unavailability of credit.

Borrowers may not participate in both the Main Street New Loan Facility and in the Expanded Loan Facility.

The terms of the loans under either facility are as follows:

  • Minimum loan size of $1 million
  • Adjustable interest rate of Secured Overnight Financing Rate (currently set at 1 basis point) plus 250-400 basis points; this rate to be set by the lending bank
  • 4-year maturity
  • Amortization of principal and interest deferred for one year
  • Prepayment permitted without penalty

Lenders are authorized to charge borrowers origination fees of 100 basis points on the amount of the loan or the upsized tranche. Additionally, the bank may ask the borrower to pay the 100-basis point facility fee that the lender owes to the Special Purpose Vehicle established by the Federal Reserve to buy 95% of each loan.

For those businesses interested in the New Loan Facility, maximum loan size is 4 times the borrower's 2019 EBITDA up to $25 million (the 4 times multiple must include the borrower's existing outstanding and committed but undrawn debt). These loans are unsecured by collateral.

For those businesses that want to borrow under the Main Street Expanded Loan Facility, maximum loan size is 6 times the borrower's 2019 EBITDA up to $150 million, or 30% of the borrower's existing outstanding and committed but undrawn bank debt. As with the New Loan Facility, if using the 6 times multiple test, the loan amount is limited by the borrower's existing outstanding and committed but undrawn debt. Any loans under this facility will not require any additional collateral beyond any already required by the existing debt.

Restrictions Placed on a Borrower

Unlike the PPP loans, there are no forgiveness provisions for Main Street loans. To the contrary, any borrower under this program needs to understand the numerous restrictions placed on them for the duration of the loan period and, in some cases, for some time after the loan is fully repaid.

Some of the restrictions relate to the uses of the loan funds, including:

  • Borrowers cannot use loan proceeds to repay other loan balances
  • Borrowers cannot repay other debts of equal or lower priority (other than mandatory principal payments) until the Main Street loan is repaid in full
  • Borrowers may not seek to cancel or reduce any outstanding line of credit with any lenders
  • The borrower must certify that they will use the loan proceeds to "make reasonable efforts" to maintain payroll and retain employees during the loan term (This differs from the original language in the CARES Act that specified "the funds must be used to retain at least 90 percent of the recipient's workforce at full compensation and benefits until September 30, 2020" and is another area that may change as additional guidance is released)

There are several other certifications and restrictions placed on borrowers by the Main Street program. Certifications include:

  • The loan is necessary due to current economic uncertainties
  • The recipient must certify that they intend to restore not less than 90 percent of its workforce in place on February 1, 2020 at full compensation and benefits not later than four months after the end of the public health emergency related to COVID-19
  • The borrower will not outsource or offshore jobs until two years after the loan is repaid
  • The borrower will remain neutral in any union organizing effort during the term of the loan and will not repeal any collective bargaining agreements at any time during and for two years after the loan is repaid

Finally, there are tight restrictions related to shareholder and executive compensation:

  • No dividends, capital distributions or stock buybacks will be permitted until one year after the loan has been paid off.
  • Any executive or officer whose total compensation was more than $425,000 in 2019 will be precluded from receiving an increase to their total compensation until one year after the loan has been repaid. In addition, they may also not be paid any severance or termination benefits greater than $850,000. Total compensation includes salary, bonus, stock awards and other financial benefits.
  • The total compensation of any officers or executives paid over $3 million in 2019 will be limited to $3 million plus 50 percent of the amount over $3 million until one year after the loan has been repaid.

Next Steps

No application process has been announced yet. The Federal Reserve is currently accepting comments on these programs through April 16, 2020.

We're Here to Help

We're closely monitoring the hour-by-hour changes, and we will send out updates as they become available. Reach out to our experts if you need further information on this topic.

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