April 10, 2020
The Federal Reserve and U.S. Treasury announced they will make $600 billion in “Main Street” loans available to U.S. businesses with up to 10,000 employees or $2.5 billion in 2019 revenue. The Main Street loan program, bolstered by funds in the Coronavirus Aid, Relief, and Economic Security Act (CARES), is part of a broader effort by the Federal Reserve to make $2.3 trillion in loans available to assist households, employers of all sizes and state and local governments to address the impact of the coronavirus.
Lockton comment: This alert describes the Main Street Lending Program. The Federal Reserve and Treasury announcement (opens a new window) discusses other programs available for employers of all sizes as well as for state and local governments. The Federal Reserve has committed to buying bonds directly from companies and on the secondary market to ensure companies have enough credit to keep functioning and limit layoffs, and to encourage banks to lend to corporations by supporting a strong secondary market to sell that debt to. Cities with a population of at least one million and counties with a population of at least two million will also be able to obtain needed capital from the Federal Reserve in exchange for issuing debt.
Eligible employers
Main Street loans are available for businesses with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues. In addition, the employer must be a business that was created or organized in the U.S., has significant operations in the U.S. and a majority of employees based in the U.S.
An employer may receive both a Main Street loan and a Paycheck Protection Program (opens a new window) (PPP) loan, provided it is eligible for both. However, employers that have directly sold bonds to the Federal Reserve through the Primary Market Corporate Credit Facility since March 23, 2020, are not eligible.
Lockton comment: Initial guidance does not answer important questions relevant to many businesses. To start, the term “business” is not defined. We suspect it will include both for-profit and nonprofit businesses based on language in the CARES Act, but additional guidance will be necessary to confirm. Further, it is not clear whether affiliation rules will aggregate the employee count and revenue calculation of related businesses when determining whether the employee or revenue thresholds are eclipsed. It also does not explain how foreign ownership of a U.S. employer may impact eligibility. We suspect future guidance will provide clarity.
Loan terms
Main Street loans are recourse loans, meaning lenders may seek full repayment from a borrower’s other assets if the borrower defaults. Loans will have the following terms:
Four-year maturity
Amortization of principal and interest deferred for the first year
Adjustable interest rate of the secured overnight financing rate, currently at .1%, plus 2.5-4.0%
Minimum loan size of $1 million
Maximum loan size of:
For new loans: The lessor of (i) $25 million or (ii) an amount that, when added to the borrower’s existing outstanding and committed undrawn debt, does not exceed four times the borrower’s 2019 EBITDA.
For increasing loans that a borrow originated with a qualified lender prior to April 8, 2020: The lessor of (i) $150 million, (ii) 30% of the borrower’s existing outstanding and committed but undrawn bank debt, or (iii) an amount that, when added to the borrower’s existing outstanding and committed undrawn debt, does not exceed six times the borrower’s 2019 EBITDA.
Unlike PPP loans, Main Street loans are not forgivable. There are no penalties for prepayment.
Required attestations
Borrows must make several attestations and commitments when applying for a Main Street loan, including:
The loan is necessary to address the exigent circumstances presented by the coronavirus pandemic.
The borrower will make reasonable efforts to maintain its payroll and retain its employees during the term of the loan.
The borrower will comply with the restrictions on compensation, which includes salary, bonuses, awards of stock and other financial benefits, for the term of the loan and one year after:
Compensation cannot be increased for any employee or officer whose 2019 total compensation exceeded $425,000.
Compensation for any employee or officer whose 2019 total compensation exceeded $3 million is capped at $3 million plus 50 percent of the excess compensation over $3 million.
For any person in either of the above categories, severance pay upon termination may not exceed two times 2019 total compensation.
The borrower will comply with limitations on stock buybacks and capital distributions.
The borrower meets the EBITDA requirements discussed above.
The borrower will refrain from using the proceeds of the loan to repay other loan balances and from repaying other debt of equal or lower priority, except for mandatory principal payments, unless the borrower has first repaid the loan in full.
The borrower will not seek to cancel or reduce any of its outstanding lines of credit with any lender.
The borrower 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.
Attaining a Main Street loan
Loans are available through Sept. 30, 2020, but the program may be extended. Loans can be attained through lenders who also agree to a variety of conditions for participating in the program including the requirement that the lender retain a 5% share of the loan; the Federal Reserve will purchase the remaining 95%. Borrowers must pay a 1% commitment fee on the principal amount of the loan sold to the Federal Reserve.
Interested borrowers are encouraged to contact their lending institutions for more details.
Comments and additional guidance
The Federal Reserve and Treasury have asked for comments on the program by April 16, 2020. Comments can be filed using this form (opens a new window). Additional guidance is expected after the comment period.
Not legal advice: Nothing in this Alert should be construed as legal advice. Lockton may not be considered your legal counsel, and communications with Lockton's Government Relations group are not privileged under the attorney-client privilege.
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