June 11, 2020
On June 8, 2020, the Federal Reserve Board (“Fed”) expanded its $600 billion Main Street Business Lending (“MSBL” or “Main Street”) program, announcing new concessions for small businesses among other changes.
The Main Street program was initially announced as part of the $2.3 trillion “coronavirus rescue package” and was aimed at bolstering credit in the monetary system to increase lending capabilities to small and medium-sized businesses that may have not qualified for prior programs under the stimulus package. The Main Street Loan Facility ("MSLF") establishes three different credit facilities – the Main Street New Loan Facility (“MSNLF”) and the Main Street Priority Loan Facility (“MSPLF”), which issue new loans, and the Main Street Expanded Loan Facility (“MSELF”), which upsizes existing loans.
Since the programs initial announcement, the Fed has sought extensive feedback and comments from small and medium-sized business stakeholders alike. Over the past two months, the Fed has made it clear that loan terms and requirements may be subject to further adjustment as the program evolves. The Fed expects the Main Street program to be open for lender registration soon and to be actively buying loans shortly afterwards. For additional information on the Fed’s June 8, 2020 press release, click here.
Frankly, the Main Street program has been off to a slow start. Many businesses have been confused by the facilities, and lenders have been waiting for specific direction from the Fed. Additionally, too many businesses and lenders were concerned about eligibility and implementation. In response to some of these concerns, the Fed announced changes to the program on June 8, 2020 that include longer maturity dates, lower minimum amount thresholds, and increases in maximum loan sizes. All of these changes are expected to increase participation and eligibility for small and mid-size businesses.
The Fed’s new proposal will result in the following changes to the scope, terms, and eligibility of the three facilities:
- Minimum loan sizes for MSNLF and MSPLF loans have been reduced from $500,000 to $250,000
- Maximum loan sizes have been stepped-up across the board
- MSNLF: Maximum loan sizes have been increased to $35 million (previously capped at $25 million)
- MSPLF: Maximum loan sizes have been increased to $50 million (previously capped at $25 million)
- MSELF: Maximum loan sizes have been increased to $300 million (previously capped at $200 million)
- Loan terms have been increased to five years (previously four years) for each facility
- Repayment periods for all loans have been extended by delaying principal payments for two years (rather than one), with 15%, 15%, 70% repayment due in years 3, 4, and 5, respectively
- The Reserve Bank's participation for all loans has been increased to 95% (previously 85% for MSPLF loans)
The Gordon & Rees team has summarized the program and the implications for lenders and borrowers in light of the changes below:
Lenders & Borrowers
Which financial institutions are eligible to lend under MSLP?
An Eligible Lender is: (1) a U.S. federally insured depository institution (including a bank, savings association, or credit union); (2) a U.S. branch or agency of a foreign bank; (3) a U.S. bank holding company; (4) a U.S. savings and loan holding company; (5) a U.S. intermediate holding company of a foreign banking organization; or, (6) a U.S. subsidiary of any of the foregoing.
Which businesses are eligible for MSLP loans?
Eligible Borrowers are businesses: (1) established prior to March 13, 2020; (2) are not ineligible businesses (businesses listed in 13 CFR 120.110(b)-(j) and (m)-(s)); (3) with up to 15,000 employees (formerly 10,000) or up to $5 billion (formerly $2.5 billion) in 2019 annual revenues; (4) created or organized in the United States or under US law with significant operations and a majority of their employees in the United States; (5) that do not already participate in the MSNLF, the MSPLF or the MSELF or the Primary Market Corporate Credit Facility; and, (6) have not received prior support under the CARES Act. Eligible Borrowers may not participate in more than one of the three facilities under MSLP.
Nonprofit organizations fall into the category of Ineligible Borrowers under CFR § 120.110 (a) –– will there be Main Street relief for nonprofit organizations in the future?
As stated in the Fed’s June 8, 2020, press release: “[n]onprofit organizations play a critical role throughout the economy, and the Board is working to establish a program soon for these organizations.”
What if I originated a loan under the previously announced loan terms, but am no longer an Eligible Borrower?
The Main Street Lending Program will also accept loans that were originated under the previously announced terms, if funded before June 10, 2020.
When will the loans be available, and when may a business submit an application?
Soon. The Fed expects the Main Street program to be open for lender registration soon and to be actively buying loans shortly afterwards. All MSLP measures are in place from April 9, 2020 through September 30, 2020, unless otherwise extended.
The Main Street New Loan Facility (“MSNLF”)
What is an Eligible Loan under MSNLF?
An Eligible Loan under the MSNLF is a term loan made by an Eligible Lender to an Eligible Borrower that was originated after April 24, 2020 (previously April 8, 2020).
What are the loan terms under MSNLF?
- Loan Term: 5 years (formerly four years)
- Minimum Loan Size: $250,000 (formerly $500,000)
- Maximum Loan Size: The lesser of (1) $35 million (formerly $25 million); or (2) an amount that, when added to the borrower’s existing outstanding and committed bank debt, would not exceed four times the borrower’s 2019 EBITDA
- Interest Rate: Adjustable rate of LIBOR (1 or 3 month) + 300 basis points
- Amortization:
- Principle payments deferred two years (previously one year) and interest payments deferred one year (unpaid interest will be capitalized)
- Principal amortization of 15% at the end of the third year, 15% at the end of the fourth year, and a balloon payment of 70% at maturity at the end of the fifth year (previously 33% due in Y2, Y3, and Y4, respectively)
- Prepayment: Permitted without penalty
- Collateral: Secured or unsecured
- Lender Risk Retention: 5%
- Reserve Bank Participation: 95%
The Main Street Priority Loan Facility (“MSPLF”)
What is an Eligible Loan under MSPLF?
An Eligible Loan is a term loan made by an Eligible Lender(s) to an Eligible Borrower that was originated after April 24, 2020 (previously April 8, 2020).
What are the loan terms under MSPLF?
- Maturity: 5 years (previously four years)
- Minimum Loan Size: $250,000 (previously $500,000)
- Maximum Loan Size: The lesser of (1) $50 million (formerly $25 million); or (2) an amount that, when added to the borrower’s existing outstanding and committed bank debt, would not exceed six times the borrower’s 2019 EBITDA
- Interest Rate: Adjustable rate of LIBOR (1 or 3 month) + 300 basis points
- Amortization:
- Principle payments deferred two years (previously one year) and interest payments deferred one year (unpaid interest will be capitalized)
- Principal amortization of 15% at the end of the third year, 15% at the end of the fourth year, and a balloon payment of 70% at maturity at the end of the fifth year (previously 15%, 15%, 70% repayment due in Y2, Y3, and Y4, respectively)
- Prepayment: Permitted without penalty
- Collateral: Secured or unsecured
- Lender Risk Retention: 5% (previously 15%)
- Reserve Bank Participation: 95% (previously 85%)
The Main Street Expanded Loan Facility (“MSELF”)
What is an Eligible Loan under MSELF?
An Eligible Loan under the MSELF is an upsized term loan made by an Eligible Lender to an Eligible Borrower that was originated before April 24, 2020 (previously April 8, 2020).
What are the loan terms under MSELF?
- Maturity: 5 years (formerly four years)
- Minimum Loan Size: $10 million (no change)
- Maximum Loan Size: the lesser of (1) $300 million (formerly $200 million); or (2) an amount that, when added to the borrower’s existing outstanding and committed bank debt, would not exceed six times the Eligible Borrower’s 2019 earnings before interest, taxes, depreciation, and amortization (EBITDA)
- Interest Rate: Adjustable rate of LIBOR (1 or 3 month) + 300 basis points
- Amortization:
- Principle payments deferred two years (previously one year) and interest payments deferred one year (unpaid interest will be capitalized)
- Principal amortization of 15% at the end of the third year, 15% at the end of the fourth year, and a balloon payment of 70% at maturity at the end of the fifth year (previously 15%, 15%, 70% repayment due in Y2, Y3, and Y4, respectively)
- Prepayment: Permitted without penalty
- Collateral: Secured or unsecured
- Lender Risk Retention: 5%
- Reserve Bank Participation: 95%
Our Business Transactions Group is available to answer your questions and to provide guidance on these rapidly evolving issues, challenges and opportunities. In addition to the following, we are closely following the regulations on a state by state level defining essential business and other related matters. Please contact us if we may be of assistance.
Special thanks to Emily Lundquist for her contributions to this article.