So much has been written about Paycheck Protection Program loans since the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020, that little focus has been given to the “other” loan program intended to add monetary stimulus to the economy in the wake of the pandemic crisis.
The $600 billion Main Street Lending Program (MSLP) was created to provide support for small and mid-sized businesses across the United States through the facilitation of credit. The MSLP is intended to help companies that were in sound financial condition prior to the onset of the COVID-19 pandemic to maintain their operations and payroll until conditions normalize. These objectives will be accomplished via the provision of five-year term loans from eligible lenders to eligible U.S. businesses.
It is important to note that the MSLP is designed to complement other SBA and CARES Act loans such as the Paycheck Protection Program. The program is separate from the CARES Act, and is run under the auspices of the Federal Reserve.
Basics of the Main Street Lending Program
This loan program, like the PPP, has been the subject of a great deal of “dribbled out” guidance via publications from the Federal Reserve after first being announced on March 23, 2020. Also, like the PPP, further guidance is still expected on the MSLP. A summary of the basic provisions of the program is included below. For more information, view the Federal Reserve’s Updated Program Overview or the most-recent version of MSLP FAQs.
Eligible businesses are those that, together with their affiliates, have up to 15,000 employees or revenues no greater than $5 billion. (The Federal Reserve has clarified that the affiliation rules applied by the SBA to determine eligibility under the PPP will also apply in respect of certain criteria under the MSLP).
Generally, larger businesses may apply for the loans, if the following criteria are met:
- The borrower’s business must have been created in the United States prior to March 13, 2020, and have significant United States operations and employee base.
- The borrower must have been in sound condition prior to the COVID-19 pandemic.
- The borrower may NOT participate in both the MSLP and the PMCCF Program.
LIMITATIONS ON USAGE AND ATTESTATIONS
In order to borrow funds under this program, businesses must comply with the following requirements:
- Commit to refrain from using the MSLP to repay any other loan balances and further commit to refraining from repaying any other debt of equal or lower priority (outside of mandatory principal payments) until the MSLP is repaid in full.
- Attest to not reduce or cancel any outstanding lines of credit.
- Attest that the financing is required due to impacts of COVID-19, and that the business will make reasonable efforts to maintain payroll for the duration of the loan.
- 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.
- Certify eligibility, including meeting the conflict of interest prohibition 4019(b) of the CARES Act.
TERMS AND CONDITIONS OF MAIN STREET LOANS
- Maturity – five years
- Payment Deferral – no interest payments for one year (interest will be capitalized if not paid); no principal payments required during the first or second year (first payment due on the third anniversary of the Main Street Loan)
- Amortization – 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
- Interest Rate – adjustable rate of LIBOR20 (1 or 3 months) plus 3.0%
- Minimum Loan Size – $250,000 for New Loans and Priority Loans, and $10M for loan increases
- Prepayment Penalty – none
- Forgiveness – none
LOAN FACILITY FEES
Unlike borrowers with PPP loans, businesses should expect to pay anywhere from 100 to 200 basis points on the principal of the loan from the following fees:
- Facility Fee – Lenders will pay a facility fee of 100 basis points of the principal. The lender can require the borrower to pay this fee.
- Loan Origination and Servicing Fee – Borrowers will pay lenders a loan origination fee of 100 basis points of the principal.
There are three types of facilities available under the MSLP, and the most recent guidance included updated term sheets for loans provided under the MSLP.
- Main Street New Loan Facility (MSNLF)
- Main Street Priority Loan Facility (MSPLF)
- Main Street Expanded Loan Facility (MSELF)
The MSNLF allows for new loans originating on or after April 8, 2020, while the MSELF allows borrowers to expand financing for loans originating prior to April 8, 2020.
Borrowers who apply for and receive loans under the PPP are also eligible to take further loans under the MSLP. However, borrowers are limited to utilizing only one of the program’s facilities: the MSNLF, the MSPLF, or the MSELF.
A business is not eligible for MSLP loans if it participates in the Primary Market Corporate Credit Facility (PMCCF), which is separate and apart from the MSLP. Additionally, a business cannot apply for a MSLP loan if it has received support pursuant to Subtitle A of the Tile IV of the CARES Act.
Expansion of the Main Street Lending Program
On June 8, 2020, the Federal Reserve Board expanded the MSLP to allow more small and medium-sized businesses to be able to receive support. These changes, outlined in a press release issued by the Federal Reserve, are intended to enhance the appeal of the program for businesses in a number of ways, including:
- Lowering the minimum loan size for “New Loans” and “Priority Loans”to $250,000 (from $500,000);
- Increasing the maximum loan size for all Main Street Loans;
- Lengthening the term of each loan option to five years (from four years), and providing an additional year of payment deferral;
- Increasing the FRB Boston participation rate in “Priority Loans” to 95% (from 85%); and
- Reducing the amortization schedule for “New Loans”
The Board expects the Main Street program to be open for lender registration soon and to be actively buying loans shortly afterwards. Click here for updated forms and agreements.
Borrowers should clearly understand that loans under this program will not be forgiven and must be paid back under the general terms set forth above. However, such loans can serve to overcome any number of financial economic and operational issues driven by the pandemic. In these instances, careful consideration of these loans could prove beneficial in weathering the storm.