May 5, 2020

The U.S. Treasury and Federal Reserve recently revised the terms and conditions for the Main Street Lending Program (Program). The revisions:

• Expand eligibility for employers with up to 15,000 employees or less than $5 billion in 2019 revenue

• Allow pass-through companies (like S corporations) to make normal distributions during the term of the loan

• Make other modifications from the original announcement (see our prior alert (opens a new window))

The Program is still not finalized, so prospective borrowers and lenders will have to wait for additional details before finalizing applications.

The basic structure of the Program remains the same. Private lenders will originate new loans, or additional tranches of preexisting loans, then sell a portion of the loan to the Federal Reserve. The Federal Reserve will have the ability to participate in up to $600 billion in loans, though that amount could be increased if there is enough demand before the announced Sept. 30, 2020, termination date.

Loan terms

There are three loan options, known as facilities: Main Street New Loan Facility (MSNLF), Main Street Priority Loan Facility (MSPLF) and Main Street Expanded Loan Facility (MSELF). The MSNLF and MSPLF are both for loans to new borrows, while the MSELF is available to borrows that already have a loan from an eligible lender.

Eligibility: Eligible businesses include those that were established prior to March 13, 2020, and have 15,000 employees or fewer, or had 2019 annual revenues of $5 billion or less. Affiliated employers (opens a new window) of the borrower are aggregated when determining employer size and revenue. An eligible business must also be created or organized in the United States or under the laws of the United States with significant operations and most of its employees based in the United States.

Businesses cannot simultaneously participate in more than one facility and cannot participate in certain other programs through the Federal Reserve. A business that received a Paycheck Protection Program (PPP) loan can also receive a Main Street loan; however, many types of businesses ineligible for a PPP loan will also be ineligible for a Main Street loan, including financial institutions, casinos and private clubs (see 13 CFR Section 120.110(b)-(j) and (m)-(s)).

Loan amount: The minimum and maximum amount depends on the type of loan with the maximum amount being driven by the business’s current debt.

MSNLF

• Minimum: $500,000

• Maximum: The lesser of (i) $25 million or (ii) an amount that when added to outstanding debt (including committed but undrawn debt), is less than four times the borrower’s adjusted 2019 EBITDA.

MSPLF

• Minimum: $500,000

• Maximum: The lesser of (i) $25 million or (ii) an amount that when added to outstanding debt (including committed but undrawn debt), is less than six times the borrower’s adjusted 2019 EBITDA.

MSELF

• Minimum: $10,000,000

• Maximum: The lesser of (i) $200 million, (ii) 35% of the borrower’s outstanding debt (including committed but undrawn debt) or (iii) an amount that when added to outstanding debt (including committed but undrawn debt), is less than six times the borrower’s adjusted 2019 EBITDA.

Interest rate: The interest rate is adjustable and was updated to be tied to the LIBOR (one or three month), a rate typically used for loans among financial institutions, plus 3%. Both the one- and three-month LIBOR rates are currently less than 1%.

Loan repayment: Each facility has a four-year amortization with principal deferred and interest capitalized for the first year. For the MSNLF, one-third of the loan is due by the end of years two through four. For the MSPLF and MSELF, 15% is due at the end of years two and three, and the remaining 70% is due at the end of year four.

Forgiveness and prepayment: The loans are not forgivable but there is no penalty for prepayment.

Origination fee: Borrowers in the MSNLF and MSPLF will pay an origination fee of up to 1% of the loan at the time of origination. Borrowers in the MSELF will pay an origination fee of up to .75% of the upsized loan tranche at the time of origination.

Required borrower certifications and covenants

Borrowers must make several attestations and commitments when applying for a Main Street Loan, as discussed in our prior alert (opens a new window). The new guidance provides some important modifications, including:

• Employee retention: It appears borrowers will not be required to certify their intent to maintain payroll and retain employees during the term of the loan but must merely make commercially reasonable efforts to do so.

• Restrictions on capital distributions: The new guidance clarifies that borrowers organized as pass-throughs (e.g., S corporations and LLCs) can still make capital distributions to the extent such distributions are reasonably required to cover the owner’s tax obligations with respect to pass-through earnings from the borrower.

• Financial stability: A new certification is required that the borrower must have a reasonable basis to believe that as of the date of origination, it had the ability to meet its financial obligations for at least the next 90 days.

• Lender requirements: The borrower requirements in the new guidance are a minimum, and lenders are permitted to establish additional standards.

Obtaining a loan

The Program is not yet live, and it is not clear when it will begin. Interested employers will still want to reach out to their lenders to begin preparing any materials the lender believes will be necessary. The Federal Reserve will publicly issue a form loan participation agreement, form borrower and lender certifications, and other form agreements that are necessary to implement the Program in accordance with the new guidance.

Download alert (opens a new window)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.