By Andrew Cross and Andrew Smetana

Introduction

As has been widely reported, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides approximately $2 trillion in relief to address the COVID-19 outbreak and economic fallout.  This legislation and other recent legislation related to the COVID-19 outbreak include several programs that are designed to provide financial support to small and medium-sized business.  One such program is an expansion of the Federal Reserve Board’s Main Street Lending Program (the “Main Street Program”).  On April 9th, the Federal Reserve Board announced the established two facilities that together will provide up to $600 billion of funding for the Main Street Program. This makes funding available for businesses with up to 10,000 employees or $2.5 billion in 2019 annual revenues, including companies that may not qualify for the Paycheck Protection Program.  Notably, any business that borrows money under the Main Street Program will be subject to limitations on (i) executive compensation, (ii) its ability to pay a dividend or distribution, and (iii) if it is a public company, its ability to repurchase its shares.

Background and Q&A

On April 9th, the Federal Reserve Board (“FRB”) announced that it established two facilities to expand its Main Street Lending Program to provide access to capital for businesses with up to 10,000 employees or $2.5 billion in 2019 annual revenues. This is being implemented through two similar facilities:

  1. The Main Street New Loan Facility (the “New Loan Facility”); and
  2. The Main Street Existing Loan Facility (the “Existing Loan Facility,” and together with the New Loan Facility, the “Facilities”).

The following Questions and Answers provide an overview of the key elements of the Facilities. Additional summary information and related diagrams depicting how these Facilities work can be found here.

  1. What is the common objective of the Facilities?

The objective of the two is to facilitate lending to small and medium-sized businesses.

    • The New Loan Facility will allow an Eligible Bank to originate new loans to eligible borrowers.
    • The Existing Loan Facility will allow an Eligible Bank to increase the size of existing loans to eligible borrowers.

The Main Street Program and the Facilities place restrictions on borrowers and lenders (see questions 8 and 9 below) that will need to be reflected in loan documents and, in the case of existing loans, loan modifications.

  1. What types of financial institutions qualify as Eligible Lenders under the Main Street Program?

U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies.

  1. What types of businesses qualify as Eligible Borrowers under the Main Street Program?

In order to borrow money from an Eligible Lender, a business must meet the following qualifications:

    • Have up to 10,000 employees or up to $2.5 billion in 2019 annual revenues; and
    • 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.

Businesses that meet these qualifications are referred to as “Eligible Borrowers”.

Unlike loans under the Small Business Administration’s Paycheck Protection Program, loans under the Main Street Program do not apply so-called “affiliation” rules to determine the business’ number of employees.

  1. What types of loans can be made to Eligible Borrowers under the Main Street Program?

The Main Street Program provides for term loans that have the following features:

    • Date of Origination – Different under each Facility:
      • For the New Loan Facility, the loan must have been originated on or after April 8, 2020; or
      • For the Existing Loan Facility, loan must have been originated before April 8, 2020;
    • Maturity – 4 years
    • Deferred Amortization – Amortization of principal and interest deferred for one year
    • Floating Rate + Spread – Adjustable rate of the secured overnight financing rate (SOFR) + 250-400 basis points per year
    • Minimum Loan Size – $1 million
    • Maximum Loan Size – Different under each Facility:
      • For the New Loan Facility, maximum loan size is the lesser 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 Eligible Borrower’s 2019 earnings before interest, taxes, depreciation, and amortization (“EBITDA”): or
      • For the Existing Loan Facility, is the lesser 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.

Prepayment Allowed – Prepayment permitted without penalty

Collateral / Security – A term loan under the New Loan Facility can be unsecured. The Existing Loan Facility is available to increase an existing Eligible Loan without regard to whether it is secured. The amount of the loan that is being increased under the Existing Loan Facility is referred to as the “upsized tranche”.

  1. How do these Facilities support the Main Street Program?

Reference is made to the diagram of the Main Street Program provided here.

To support the Main Street Program, a Federal Reserve Bank will commit to lend to a single common special purpose vehicle (“SPV”) on a recourse basis. This SPV will also receive a $75 billion equity investment from the U.S. Department of the Treasury. The combined size of the Facilities will be up to $600 billion.

The SPV will purchase 95% participations from Eligible Lenders at par value.

The 95% participations will vary under the two different Facilities:

    • For the New Loan Facility – 95% participations in Eligible Loans originated by the Eligible Lenders; and
    • For the Existing Loan Facility – 95% participations in the upsized tranche of an Eligible Loan, provided that the loan is upsized on or after April 8, 2020.

The Eligible Lenders will retain 5% of each Eligible Loan or the upsized tranche of an Eligible Loan in the case of the New Loan Facility or Existing Loan Facility, respectively.

The SPV and the Eligible Lender will share risk in the Eligible Loan on a pari passu basis.

Further, in the case of the Existing Loan Facility, collateral that secures the Eligible Loan will secure the loan participation on pro rata basis regardless of whether the collateral was pledged prior to or at the time of the upsize.

  1. What are the fees associated with the New Loan Facility?

The fees for the New Loan Facility consist of the following:

    • Facility Fee – An Eligible 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 Eligible Lender may require the Eligible Borrower to pay this fee.
    • Loan Origination and Servicing Fees – An Eligible Borrower will pay an Eligible Lender an origination fee of 100 basis points of the principal amount of the Eligible Loan. The SPV will pay an Eligible Lender 25 basis points of the principal amount of its participation in the Eligible Loan per annum for loan servicing.
  1. What are the fees associated with the Existing Loan Facility?

The fees for the Existing Loan Facility consist of the following:

    • Loan Upsizing and Servicing Fees – An Eligible Borrower will pay an Eligible Lender a fee of 100 basis points of the principal amount of the upsized tranche of the Eligible Loan at the time of upsizing. The SPV will pay an Eligible Lender 25 basis points of the principal amount of its participation in the upsized tranche of the Eligible Loan per annum for loan servicing.
  1. What are the specific commitments that will need to be made by Eligible Borrowers under the Facilities?

Some commitments of Eligible Borrowers are common to both facilities, while other commitments are unique to each respective Facility.

Commitments of Eligible Borrowers Common to Both Facilities

Both Facilities require Eligible Borrowers to:

    • Attest that they meet the applicable EBITDA leverage condition (4x EBITDA under the New Loan Facility and 6x leverage under the Existing Loan Facility);
    • Attest that they will 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. This means that an Eligible Borrower must agree that:
      • until 12 months after the loan is no longer outstanding, it will not repurchase listed equity securities (including securities issued by the borrower’s parent), except to the extent required under a contractual obligation in existence as of March 27, 2020;
      • until 12 months after the loan is no longer outstanding, it will not pay dividends or make other capital distributions with respect to the common stock of the business (no exception for pre-existing obligations); and
      • from the date of the loan through one year after the loan is repaid, the borrower will not pay “total compensation” (including salary, bonuses, stock, and other financial benefits provided to the officer or employee) or severance to officers or employees whose total compensation exceeded $425,000 in 2019, or $3 million in 2019, in excess of the following amounts:
        • compensation for officers and employees compensated in amounts over $425,000, but less than $3 million, in 2019 is capped at the total compensation level they received in 2019; and
        • compensation for officers and employees compensated over $3 million in 2019 is capped at the sum of (i) $3 million plus (ii) 50% of the amount received by the officer or employee in 2019 that was in excess of $3 million; and
      • Certify that they are eligible to participate in the Facility, including in light of the conflicts of interest prohibition in section 4019(b) of the CARES Act (i.e., that it is not an entity in which the President, Vice President, the head of an Executive department, or a Member of Congress (or a family member of any of them) directly or indirectly holds a controlling interest).

Additional Commitments of Eligible Borrowers Under the New Loan Facility

The New Loan Facility will require Eligible Borrowers to attest that they require financing due to the exigent circumstances presented by the coronavirus disease 2019 (“COVID-19”) pandemic, and that, using the proceeds of the Eligible Loan, they will make reasonable efforts to maintain their payrolls and retain their employees during the term of the Eligible Loan.

Additional Commitments of Eligible Borrowers Under the Existing Loan Facility

The Existing Loan Facility will require Eligible Borrowers to:

    • Commit to refrain from using the proceeds of the upsized tranches of the Eligible Loans to repay other loan balances;
    • Commit to refrain from repaying other debt of equal or lower priority, with the exception of mandatory principal payments, unless the Eligible Borrowers have first repaid the Eligible Loan in full; and
    • Attest that they require financing due to the exigent circumstances presented by the COVID-19 pandemic, and that, using the proceeds of the upsized tranches of the Eligible Loans, they will make reasonable efforts to maintain their payroll and retain their employees during the term of the upsized tranches of the Eligible Loans.
  1. What are the specific commitments that will need to be made by Eligible Lenders under the Facilities?

Commitments of Eligible Borrowers Common to Both Facilities

Both Facilities require Eligible Lenders to certify that they are eligible to participate in the Facility, including in light of the conflicts of interest prohibition in section 4019(b) of the CARES Act (i.e., that they are no entities in which the President, Vice President, the head of an Executive department, or a Member of Congress (or a family member of any of them) directly or indirectly holds a controlling interest).

Additional Commitments of Eligible Lenders Under the New Loan Facility

The New Loan Facility will require Eligible Lenders to attest that the proceeds of the Eligible Loan will not be used to repay or refinance pre-existing loans or lines of credit made by the Eligible Lenders to the Eligible Borrowers.

Additional Commitments of Eligible Lenders Under the Existing Loan Facility

The Existing Loan Facility will require Eligible Lenders to attest that the proceeds of the upsized tranches of the Eligible Loans will not be used to repay or refinance pre-existing loans or lines of credit made by the Eligible Lenders to the Eligible Borrower, including the pre-existing portion of the Eligible Loans.

  1. When will the Facilities terminate?

The SPV will cease purchasing participations in Eligible Loans on September 30, 2020, unless the FRB and the U.S. Department of the Treasury extend the Facility.

Each Federal Reserve Bank will continue to fund the SPV after such date until the SPV’s underlying assets mature or are sold (i.e., up to as long as 4 years, which represents the term of an Eligible Loan).

  1. How can I find the Term Sheets for these Facilities?

The FRB’s term sheet on the New Loan Facility can be found here.

The FRB’s term sheet on the Existing Loan Facility can be found here.