On Thursday, April 9, 2020, the Federal Reserve announced the creation of the $600 million Main Street Business Lending Program which will complement the Paycheck Protection Program (PPP) and extend loans to businesses too large to meet the eligibility requirements of the PPP.
What is the Main Street Business Lending Program?
Main Street Business Lending Program is designed for companies that are considered too big to qualify for the new Paycheck Protection Program but too small to access capital markets.
Who is eligible?
U.S.-based borrowers with 10,000 or fewer employees OR up to $2.5 billion in 2019 annual revenues (borrowers with more than 10,000 employees are still eligible if they have less than $2.5 billion in revenue). Borrowers must have significant operations and a majority of its employees based in the U.S. This is good news for businesses owned by private equity firms that were ineligible under the terms of the PPP. When applying for a PPP loan, PE-owned businesses had to include the employees of most companies in the PE firm’s portfolio (affiliated companies), often causing them to exceed the PPP’s 500-employee limit. Borrowers that have already applied for a PPP loan may also apply for a Main Street Business Lending Program loan.
How much can be borrowed?
The Main Street Business Lending Program is made up of two facilities, one for new loans and one for expanding existing loans. New loans may be between $1 million and $25 million. The loan amount is limited by the borrower’s existing debt in that the new loan cannot cause the borrower’s total outstanding overall debt to exceed four times their 2019 EBITDA. The expanded loan facility allows eligible borrowers to borrow an additional $1 million to $150 million, subject to a six times their EBITDA limitation. A borrower cannot participate in both the new loan facility and the expanded loan facility. Follow these links to review the Fed’s press releases announcing the Main Street New Loan Facility and the Main Street Expanded Loan Facility.
What are the terms?
The loans mature in four years. The interest rate is adjustable, starting at 0.01% plus 250 to 400 basis points. There is a facility fee of 100 basis points that the lender may require the borrower to pay. Principal and interest are deferred for one year. Funds may not be used to repay or refinance existing loans or lines of credit. There is no prepayment penalty. The borrower must attest that it has been affected by the COVID-19 and will make “reasonable efforts” to maintain its payroll and retain its employees during the term of the loan. Additionally, the borrower must commit to refrain from using proceeds to repay other loan balances, except mandatory principal payments, until the eligible loan is paid in full. Also, there are restrictions on compensation, stock repurchases and capital distributions. The loans under the new loan facility are unsecured. No additional collateral will be required under the expanded loan facility, but any collateral already pledged under original terms will likely secure the expanded loan on a pro rata basis.
Who are the lenders?
All federally insured banks and lending institutions are eligible to lend under this program. The federal government’s special purpose vehicle (SPV) will buy 95% of the loan, leaving the financing institution retaining 5%. The eligible lender will share the risk pro rata with the SPV. We recommend discussing this loan program with your existing lending institution initially
What information will banks need for the application?
The application process and requirements likely will vary. We expect that banks will require much more documentation than the PPP, but, similar to the PPP, will likely include 2019 payroll costs.
When can businesses apply for the loans?
The Federal Reserve has announced the loans should be available in two or three weeks and will be offered through September 30, 2020. Specific information on the application process and timing has not been released.
Are there additional details?
As we learned from the PPP, the devil is in the details and subject to constant clarification, changes and guidance. The initial release about the program raises many questions that we hope will be answered in short order. The Federal Reserve and Treasury have requested input from lenders, borrowers and others until April 16, 2020 before finalizing the program. Borrowers are encouraged to monitor the development of the program details.
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WBL is here to help. We can help businesses understand their eligibility and assist with sources for these loans. Please email or call your WBL contact to discuss your needs or questions.