The Federal Reserve Lends Support to CARES Act Through Main Street Lending Program

On April 9, 2020, the Federal Reserve Board (FRB) announced that it would take steps to provide $2.3 trillion in loans and credit facilities to assist businesses and municipalities impacted by the economic effects of the COVID-19 public health emergency. In doing so, the FRB supports efforts sparked by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) to provide relief to businesses and stability to the economy as the country weathers the economic effects of the COVID-19 pandemic.

The CARES Act nudged the FRB to use its discretion to establish a lending program that would provide loans to small and medium-sized businesses consistent with the FRB’s existing authority.[1] The FRB responded by establishing the Main Street Lending Program (the MSLP), announcing that the Treasury Department will be contributing at least $75 billion in CARES Act funding toward the facilities in the program.

There are two loan facilities under the MSLP: (1) the Main Street New Loan Facility, which is designed to facilitate new lending to businesses, and (2) the Main Street Expanded Loan Facility, which is meant to enable the expansion of term loans from eligible lenders to eligible borrowers originated before April 8, 2020. In both cases, the Federal Reserve Banks, with the help of federally insured depository institutions, bank holding companies, and savings and loan holding companies acting as eligible lenders, will provide credit to small and medium-sized businesses by purchasing 95% participations in up to $600 billion in loans. Eligible lenders will retain 5% of new loans originated or the existing loans expanded under the MSLP.

The programs will be available to businesses with a maximum of 10,000 employees or with no more than $2.5 billion in 2019 annual revenue. Participating businesses must have been created or be organized in the United States or under the laws of the United States, with significant operations and a majority of its employees based in the United States. In contrast to the Paycheck Protection Program (PPP), which was established to provide relief to smaller businesses, loans under the MSLP program are not eligible for loan forgiveness.

New and expanded loans under the MSLP will have the following terms:

• A four-year maturity;
• Adjustable interest rate equal to Secured Overnight Financing Rate + 250–400 basis points;
• All principal and interest payments deferred for one year;
• Minimum loan or increased loan amount of $1 million;
• Maximum amount for new loans (i.e., under the Main Street New Loan Facility) will be the lesser (a) $25 million and (b) the amount equal to four (4) times the borrower’s 2019 EBITDA, less the borrower’s outstanding debt (including undrawn committed facilities);
• Maximum amount of expanded loans (i.e., under the Main Street Expanded Loan Facility) will be the lesser of (a) $150 million, (b) 30% of the borrower’s outstanding and committed but undrawn bank debt, and (c) the amount equal to six (6) times the borrower’s 2019 EBITDA, less the borrower’s outstanding debt (including undrawn committed facilities).  Note: the calculations for debt and EBITDA remain unclear at this stage;
• New loans will be unsecured; and
• Expanded loans will be secured on a pro rata basis with collateral, if any, securing the original term loans.

Under the new and expanded loan facilities, lenders must agree:

• Not to use the proceeds of the loan to repay or refinance pre-existing loans or lines of credit made by the lender to the borrower;
• Not to cancel or reduce any existing lines of credit outstanding to the borrower; and
• To certify that the entity is eligible to participate in the facility, including in light of the conflicts of interest prohibition in section 4019(b) of the CARES Act.  Broadly, section 4019(b) prohibits any business that is directly or indirectly owned by the president, administration officials, or members of Congress, and certain members of their immediate families, from receiving any CARES Act relief funds.

Under the new and expanded loan facilities, borrowers must:

• Refrain from using the proceeds of the loan to repay other loan balances;
• Commit to refrain from repaying other debt of equal or lower priority, with the exception of mandatory principal payments, unless the borrower has first repaid the Main Street loan in full;
• Not seek to cancel or reduce any of its outstanding lines of credit with the lender or any other lender;
• Represent that it “requires financing” due to the COVID-19 pandemic and that it will use the loan proceeds to make “reasonable efforts to maintain its payroll and retain its employees” during the term of the loan;
• Confirm that it meets the EBITDA leverage condition specifying required features of the loans;
• 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 (see our prior client here and also here); and
• Certify that the entity is eligible to participate in the facility and is not precluded from participation in light of the conflicts of interests prohibition outlined in section 4019(b) of the CARES Act, as outlined above.

Importantly, businesses that have taken advantage of the PPP facilitated by the Small Business Administration may also participate in the MSLP.  However, MSLP borrowers may not (1) participate in both the new and expanded MSLP facilities, or (2) participate in the Primary Market Corporate Credit Facility that was also recently announced by the FRB.

The Federal Reserve’s announcement of the MSLP stated the program was still being finalized and invited comments from lenders, borrowers, and other stakeholders through April 16, 2020 at this link. Further guidance may elaborate on when an organization “requires financing” in light of the coronavirus pandemic and what constitutes “reasonable efforts” to maintain payroll and retain employees.

[1] Title IV, Subtitle A (Coronavirus Economic Stabilization Act of 2020), Section 4003. Note that the FRB had already announced, prior to the enactment of the CARES Act, that it planned to announce the establishment of a Main Street Business Lending Program to support lending to eligible small and medium-sized businesses, complementing efforts by the SBA.