Federal Reserve Releases Term Sheets for Main Street Lending Facilities
On April 9, 2020, the Federal Reserve released term sheets for two Main Street Loan Facilities, which will apply to both new and expanded bank lending facilities. These facilities were created to provide government assistance to small and medium-sized businesses that were impacted by the COVID-19 epidemic. The Main Street New Loan Facility (“MSNLF”) covers eligible loans that are originated on or after April 8, 2020, while the Main Street Expanded Loan Facility(“MSELF”) covers eligible additional tranches of loans under facilities that were originated before April 8, 2020. The Federal Reserve will purchase 95 percent participations in eligible loans under each program to encourage banks to make much-needed loans to businesses. The Department of the Treasury will make a $75 billion equity investment in a special purpose vehicle in connection with these facilities. The combined size of these facilities will be up to $600 billion.
These facilities are completely separate from the Payroll Protection Program that was established under the federal CARES Act and the disaster loans that are available through the U.S. Small Business Administration. Borrowers will obtain loans through eligible private lenders, not through the Federal Reserve directly or the Small Business Administration.
The qualifications and terms for both the New and Expanded Loan Facilities are substantially identical to one another, and are summarized below.
Borrower and Lender Eligibility: Eligible borrowers will include all businesses with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues. Thus, small and mid-size businesses will be eligible to participate as borrowers. Each eligible borrower must also be a business that is created or organized in the United States, with significant operations and a majority of its employees based in the United States.
Eligible lenders will be U.S. insured depository institutions, U.S. bank holding companies and U.S. savings and loan holding companies.
Borrowers May Not Participate in Multiple Credit Programs: Borrowers that participate in the MSNLF will not be permitted to participate in MSELF, and vice versa. In addition, borrowers that participate in either the MSNLF or the MSELF will not be permitted to participate in the Federal Reserve’s Primary Market Corporate Credit Facility.
Commercial Terms of Eligible Loans: Eligible loans under either the MSNLF or the MSELF will include unsecured term loans made by eligible lenders on or after April 8, 2020, and must include the following:
- A four year maturity period;
- Deferral of amortization of principal and interest for at least one year;
- Adjustable rate of interest comprised of the secured overnight financing rate plus 250 to 400 basis points;
- A minimum loan size of $1 million;
- A maximum loan size of the lesser of: (1) $25 million; or (2) an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed four times the borrower’s 2019 EBIDTA; and
- A clause allowing prepayment of the loan without any penalty.
Required Attestations: In addition, eligible lenders and borrowers must agree to a series of required attestations for each qualifying loan. Among other things:
- Borrowers must 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 federal CARES Act. This means the following for the term of the loan plus one year:
- Compensation terms:
- No officer or employee with total compensation greater than $425,000 in 2019 (other than pursuant to a collective bargaining agreement entered into prior to March 1, 2020) may receive total compensation during any consecutive 12 month period in excess of their 2019 compensation or receive severance or other termination benefits in excess of two times their 2019 total compensation; and
- No officer or employee with total compensation greater than $3 million in 2019 may receive total compensation during any consecutive 12 month period in excess of $3 million plus 50% of that employee’s compensation excess over $3 million in 2019.
- Buybacks. The borrower may not purchase any listed equity security of itself or any parent company (except under pre-existing contractual obligations) for the term of the loan plus one year.
- Dividends. The borrower may not pay dividends or other capital distributions with respect to common stock for the term of the loan plus one year.
- Compensation terms:
- Borrowers must commit to refrain from using the proceeds of the eligible loans to repay other loan balances.
- Borrowers must commit to refrain from repaying other debt of equal or lower priority, with the exception of mandatory principal payments, unless the borrowers have first repaid the eligible loans in full.
- Borrowers must attest that they require financing due to the exigent circumstances presented by the COVID-19 pandemic, and that, using the proceeds of the eligible loans, it will make reasonable efforts to maintain its payroll and retain its employees during the term of the loan.
- Borrowers must attest that they meet the EBITDA leverage condition of the Fed’s April 9, 2020 term sheets pertaining to these facilities (i.e., amount of debt is less than four times the borrower’s 2019 EBITDA).
- Lenders and borrowers will be required to certify that they are eligible to participate in the facilities, including in light of the conflicts of interest prohibition in section 4019(b) of the CARES Act. This provision generally prohibits participation by certain members of the presidential administration, Congress, their families and entities they control.
These programs will expire on September 30, 2020, unless they are extended by the Federal Reserve and the U.S. Treasury Department. The Federal Reserve will continue to fund the special purpose vehicle after that date until its underlying assets mature or are sold.
The COVID-19 pandemic has wrought immense economic turmoil at a scale and speed that few had imagined possible, and even fewer were prepared to deal with. Having fast access to adequate sources of capital could make all the difference for businesses attempting to navigate this extraordinary time. Familiarizing yourself with the terms and requirements of the MSNLF and MSELF lending programs is an important first step in securing the funds your business needs to endure the effects of the COVID-19 epidemic.
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