On April 9, 2020, the Federal Reserve announced a series of new steps it is taking to provide loans to assist employers of various sizes, as well as to strengthen the ability of state and local governments to deliver critical services during the coronavirus disease 2019 (COVID-19) pandemic. A central element of the new plan is the Main Street Lending Program, under which the Federal Reserve will commit to lend to a single common special purpose vehicle (“SPV”) on a recourse basis. The SPV will purchase 95 percent participations in the eligible loans from lenders (“Eligible Loans”). Eligible loans will be those made to small and medium-sized businesses that had up to 10,000 employees or $2.5 billion in revenue in 2019. The Treasury Department will provide $75 billion in equity to the SPV lending facility and the combined size of the lending facility will be $600 billion for the Main Street Lending Program. These loans could be a lifeline for small and mid-size businesses that need financing due to the “exigent circumstances” presented by the COVID-19 pandemic.
The Main Street Lending Program initiative consists of two main lending programs: the Main Street Expanded Loan Facility (“MSELF”), for loans that were originated before April 8, 2020; and the Main Street New Loan Facility (“MSNLF”), for loans that were originated on or after April 8, 2020. The programs are authorized under section 13(3) of the Federal Reserve Act, which provides the Federal Reserve with greater latitude than its normal lending authority in emergency situations.
As the program is being finalized, the Federal Reserve and Treasury Department are seeking input from lenders, borrowers and other stakeholders. The Federal Reserve has indicated that it will accept comments on its feedback form until April 16, 2020, with an effective date expected shortly thereafter. The SPV will stop purchasing participations in Eligible Loans on September 30, 2020 unless the facility is extended.
The Main Street Lending Program will provide loans to small and mid-sized businesses that were in “good financial standing” before the crisis by offering four-year loans to companies employing up to 10,000 workers or up to $2.5 billion in revenue in 2019. Principal and interest payments will be deferred for one year. Eligible Lenders may originate new Main Street loans or use Main Street loans to increase the size of existing loans to businesses. Firms seeking Main Street loans must commit to make “reasonable efforts to maintain payroll and retain workers.” Borrowers are also required to follow compensation, stock repurchase, and dividend restrictions that apply to direct loan programs under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). Firms that have taken advantage of the Paycheck Protection Program (“PPP”) may also take out Main Street loans.
Eligible Borrowers: Each eligible borrower must be a business that is created or organized in the United States or under the laws of the United States with significant operations in and a majority of its employees based in the United States (“Eligible Borrower(s)”). Eligible Borrowers that participate in the MSELF or MSNLF may not also participate in the other facility program (MSELF/MSNLF), or the Primary Market Corporate Credit Facility.
Eligible Lenders: Eligible lenders are US insured depository institutions, US bank holding companies, and US savings and loan holding companies (“Eligible Lender(s)”).
Eligible Loans − Main Street New Loan Facility: An Eligible Loan under the MSNLF is an unsecured term loan made by an Eligible Lender(s) to an Eligible Borrower that was originated on or after April 8, 2020, provided that the loan has the following features:
- A four-year maturity;
- Amortization of principal and interest deferred for one year;
- Adjustable rate of Secured Overnight Financing Rate + 250-400 basis points;
- Minimum loan size of $1 million;
- Maximum loan size that 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”); and
- Prepayment permitted without penalty.
Eligible Loans − Main Street Expanded Loan Facility
The MSELF program largely has the same features as the MSNLF, with one major exception:
Maximum loan size that is the lesser of (i) $150 million, (ii) 30 percent 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.
Loan participations for MSNLF: The SPV will purchase a 95 percent participation in an Eligible Loan at par value, and the Eligible Lender will retain five percent of the Eligible Loan. The SPV and the Eligible Lender will share risk on a pari passu basis.
Loan participations for MSELF: The SPV will purchase a 95 percent participation in an Eligible Loan at par value, and the Eligible Lender will retain five percent of the Eligible Loan. The SPV and the Eligible Lender will share risk on a pari passu basis. In addition, any collateral securing an Eligible Loan, whether such collateral was pledged under the original terms of the Eligible Loan or at the time of upsizing, will secure the loan participation on a pro rata basis.
Issues related to the EBITDA standard
The EBITDA standard may limit eligibility for loans under these programs, specifically, the EBITDA leverage of 4:1 for new loans (or 6:1 for existing loans) and use of 2019 EBITDA as a baseline.
- Companies (including some technology and venture capital-backed companies) may not have been EBITDA positive in 2019. These standards would likely make those companies ineligible for these programs.
- Companies (including some private equity-backed companies) may have existing loans that increase their leverage greater than those thresholds. These companies would likely not be eligible.
- Existing loan agreements may include caps on leverage that would also restrict access to loans under these programs. Lender consent would then be required and, unlike the PPP, the loans here are not forgivable and would not be subordinated to existing debt, making obtaining lender consent more difficult. We await further guidance on terms of subordination or requirements for collateral or personal guarantees.
Furthermore, there is a “required attestation” that the Borrower “meets the EBIDTA leverage conditions” set forth in Federal Reserve’s the term sheet. It is possible the Federal Reserve may provide more guidance on this issue.
In addition to certifications required by applicable statutes and regulations, the following attestations will be required with respect to each Eligible Loan. MSELF (for loans before April 8) and MSNLF (for loans on or after April 8, 2020) share most of the same basic attestation requirements, which include, but are not limited to:
- The Eligible Borrower must attest that it requires financing due to the exigent circumstances presented by the COVID-19 pandemic, and that, in using the proceeds of the Eligible Loan, the Eligible Borrower will make reasonable efforts to maintain its payroll and retain its employees during the term of the Eligible Loan.
- The Eligible Lender must 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 Lender to the Eligible Borrower.
- The Eligible Borrower must commit to refrain from using the proceeds of the Eligible Loan to repay other loan balances. The Eligible Borrower must commit to refrain from repaying other debt of equal or lower priority, with the exception of mandatory principal payments, unless the Eligible Borrower has first repaid the Eligible Loan in full.
- The Eligible Borrower must attest that it meets the EBITDA leverage conditions stated in the relevant section of the Eligible Loans paragraph above specifying the required features of the Eligible Loans.
- The Eligible Borrower must attest that it 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.
Limits on executive compensation
Eligible Borrowers will also be required to follow executive compensation guidelines as set forth in Section 4004 of the CARES Act. The law prohibits an officer or employee whose compensation exceeded $425,000 in 2019 from receiving severance pay or other benefits upon termination that exceeds twice their maximum total compensation. Additionally, no officer or employee whose compensation exceeded $3 million in 2019 may receive total compensation that exceeds (during any consecutive 12-month period) that sum plus 50 percent. Under the CARES Act, the term “total compensation” includes salary, bonuses, awards of stock, and other financial benefits provided by an eligible business to an officer or employee of that business.
It is expected that the Federal Reserve and Treasury Department will issue further guidance in the coming days.
If you have any questions regarding these new requirements and their implications, please contact any member of DLA Piper’s Federal Law and Policy group or Corporate group or your DLA Piper relationship attorney.
Please visit our Coronavirus Resource Center and subscribe to our mailing list to receive alerts, webinar invitations and other publications to help you navigate this challenging time.
This information does not, and is not intended to, constitute legal advice. All information, content, and materials are for general informational purposes only. No reader should act, or refrain from acting, with respect to any particular legal matter on the basis of this information without first seeking legal advice from counsel in the relevant jurisdiction.