Main Street Lending Program Update

May 4, 2020 | Insights | Authored Article | CARES Act | Industry-Specific

KEY TAKE AWAYS

The Main Street Lending Program (the “Program”) will allow Eligible Lenders to make New Loans, Priority Loans or Expanded Loans on existing debt to Eligible Borrowers who have less than 15,000 employees or less than $5 billion in 2019 annual revenues.
The Program incorporates several SBA Regulations, such as “ineligible businesses” and “affiliation” rules for determining eligibility.
The Eligible Borrower will have to agree that, for one year after the Eligible Loan is no longer outstanding, to certain prohibitions on stock buyback, paying dividends, making capital distributions, and limitations on executive compensation.

On April 9, 2020, the Federal Reserve announced the initial terms of the Main Street Lending Program (the “Program”), designed to support small and medium-sized businesses that were in sound financial condition before the onset of the COVID-19 pandemic. On April 30, 2020, the Federal Reserve published further guidance, including a term sheet for the new Main Street Priority Loan Facility (“MSPLF”) and updated term sheets for the Main Street New Loan Facility (“MSNLF”) and Main Street Expanded Loan Facility (“MSELF”) (collectively, the “Program Facilities”). article provides an updated overview of the general terms, required certifications and restrictions of the Program. We expect that regulations and further guidance will be published prior the Program becoming available. This article is based solely on current interpretations of the limited guidance published and will be updated as further guidance is released. See our original article regarding the Program here. In light of changes to the Program, the terms herein shall supersede any conflicting terms in the previous client alert. The Federal Reserve has issued a list of Frequently Asked Questions, which can found here.

Eligible Lenders under all Program Facilities are U.S. federally insured depository institutions (including banks, savings associations or credit unions), U.S. branch or agency of foreign banks, U.S. bank holding companies, U.S. intermediate holding company of foreign banking organizations, or U.S. subsidiaries of any of the foregoing.

An Eligible Borrower is a business established prior to March 13, 2020, 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, and must either: (i) have fewer than 15,000 employees as of the date of the loan or (ii) had less than $5 billion in 2019 annual revenues. Other eligibility criteria and considerations include, but are not limited to, the items listed below.

The business must not be an “ineligible business” under SBA Regulation 13 CFR 120.110(b)-(j) and (m)-(s), as modified by the Paycheck Protection Program (“PPP”).
The business must aggregate its number of employees and 2019 annual revenue with all affiliates as set forth in SBA’s Affiliation Rules under 13 CFR 121.301(f).
The business must not participate in the Primary Market Corporate Credit Facility (“PMCCF”).
The business must not receive specific support under sections 4003(b)(1)-(3) of the CARES Act (Title IV, Subtitle A – Coronavirus Economic Stabilization Act of 2020).
To calculate employees (and employees of affiliates), the business should follow the framework set out in SBA Regulation 13 CFR 121.106.
To calculate 2019 annual revenues (and revenues of affiliates), the business may use:

2019 annual “revenue” per 2019 GAAP audited financial statements; or

Annual “receipts” for fiscal year 2019, pursuant to SBA Regulation 13 CFR 121.104(a).

The business may participate in only one of the Program Facilities.
A business that received a PPP Loan are not precluded from obtaining a loan through the Program.
A business that receives a loan through one of the Program Facilities must make commercially reasonable efforts to maintain its payroll and retain its employees during the time the Eligible Loan is outstanding.
The business must have been in sound financial condition prior to the outset of the COVID-19 pandemic.
If the business had any existing loan outstanding with the Eligible Lender as of December 31, 2019, the loan must have had an internal risk rating that was equivalent to a “pass” in the FFIEC supervisory rating systems as of that date.
The business must make all of the certifications and covenants required under the Program.

Eligible Loans are term loans made by an Eligible Lender(s) to an Eligible Borrower that have the features required under each of their respective Program Facilities as follows:

“New Loan” – originated after 4/24/20 and containing the following MSNLF features:

Minimum loan size of $500,000
Maximum loan size that is the lesser of:

$25 million; or

400% of 2019 EBITDA , less existing outstanding and undrawn available debt

4 year maturity
Principal and interest payments deferred for 1 year (unpaid interest will be capitalized)
Adjustable rate of LIBOR (1 or 3 month) + 300 basis points
Principal amortization at end of: second year (1/3), third year (1/3), and maturity (1/3)
Prepayment permitted without penalty
At all times the New Loan is outstanding, it cannot be contractually subordinated in terms of priority to any other loan or debt instrument

“Priority Loan” – originated after 4/24/20 and containing the following MSPLF features:

Minimum loan size of $500,000
Maximum loan size that is the lesser of:

$25 million; or

600% of 2019 EBITDA, less existing outstanding and undrawn available debt

4 year maturity
Principal and interest payments deferred for 1 year (unpaid interest will be capitalized)
Adjustable rate of LIBOR (1 or 3 month) + 300 basis points
Principal amortization at end of: second year (15%), third year (15%), and maturity (70%)
Prepayment permitted without penalty
At all times the Priority Loan is outstanding, it must remain senior to, or pari passu with, in terms of priority and security, other loans or debt instruments, other than mortgage debt

“Expanded Loan” – originated before 4/24/20 and containing the following MSELF features:

Minimum loan size of $10 million
Maximum loan size that is the lesser of:
$200 million;

35% of existing outstanding and undrawn available debt that is pasi passu in priority with Eligible Loan and equivalent status (i.e., secured or unsecured); or

600% of 2019 EBITDA, less existing outstanding and undrawn available debt

4 year maturity
Principal and interest payments deferred for 1 year (unpaid interest will be capitalized)
Adjustable rate of LIBOR (1 or 3 month) + 300 basis points
Principal amortization at end of: second year (15%), third year (15%), and maturity (70%)
Prepayment permitted without penalty
At all times the Expanded Loan is outstanding, it must remain senior to, or pari passu with, in terms of priority and security, other loans or debt instruments, other than mortgage debt
The existing loan being extended by the Expanded Loan must have at least 18 months remaining until the maturity date; however, the maturity date of the existing loan may be extended at the time of the Expanded Loan to satisfy this requirement.

Required Borrower Certifications and Covenants under Main Street Lending Program:

The following certifications and covenants will be required with respect to each Eligible Loan:

The Eligible Borrower must commit to refrain from repaying the principal balance of, or paying any interest on, any debt until the Eligible Loan is repaid in full, unless the debt or interest payment is mandatory and due.

For a Priority Loan, the Eligible Borrower may, at the time of origination of the Eligible Loan, refinance existing debt owed to a lender that is not the Eligible Lender.

The Eligible Borrower must commit that it will not seek to cancel or reduce any of its committed lines of credit with the Eligible Lender or any other lender, until the Eligible Loan is repaid in full.
The Eligible Borrower must certify it has a reasonable basis to believe that, as of the date of the origination of the Eligible Loan, it has the ability to meet its financial obligations for at least the next 90 days and does not expect to file for Bankruptcy during that time period.
The Eligible Borrower must commit to follow compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under section 40003(c)(3)(A)(ii) of the CARES Act (see Restrictions under the CARES Act below), except that an Eligible Borrower that is an S corporation or other tax pass-through entity may make distributions to the extent reasonably required to cover its owners’ tax obligations in respect to the entity’s earnings.
The Eligible Borrower must certify it is eligible to participate in the Program Facility, including the restrictions against conflicts of interest described in section 4019(b) of the CARES Act.

Borrower Restrictions under the CARES Act

Under Section 4003(c)(3)(A)(ii), an Eligible Borrower must agree:

That while the Eligible Loan is outstanding and for 12 months thereafter, the Eligible Borrower will not repurchase an equity security of the Eligible Borrower or any parent company of the Eligible Borrower, if said equity security was listed on a national stock exchange while the Eligible Loan was outstanding, except to the extent required by a contractual obligation in effect prior to March 27, 2020;
That while the Eligible Loan is outstanding and for 12 months thereafter, the Eligible Borrower will not pay dividends or make other capital distributions with respect to the common stock of the Eligible Borrower;
That the Eligible Borrower will comply with the following compensation restrictions, as set forth in Section 4004:

Two tiers of executive compensation (including salary, stock, and bonuses) restrictions for a period of time that extends one year beyond the term of the Eligible Loan.

Officers or employees who received more than $425,000 in total compensation in 2019 cannot receive a pay raise in 2020 and cannot receive severance pay or other benefits that are more than twice their 2019 compensation.

Officers or employees who received more than $3 million in total compensation in 2019 cannot receive total compensation in 2020 in excess of (i) $3 million plus (ii) 50% of the excess over $3 million said officer or employee received in 2019.

Lender Restrictions under the Main Street Lending Program: