An introduction to the Federal Reserve’s new Main Street Lending Program

In response to the COVID-19 pandemic, Congress and the Federal Reserve created the Main Street Lending Program (Main Street). The purpose of Main Street is to provide $600 billion in low-interest loans to small and medium-sized U.S. companies. The final details are not yet available, but the Federal Reserve anticipates the program will soon be operational and has released significant information. This article summarizes the program’s basic framework and requirements once it’s up and running.

Who is eligible to receive a loan?

In general, a for-profit U.S. company is eligible to receive a Main Street loan, provided the company was in operation before March 13, 2020, and has either: (1) 15,000 or fewer employees; or (2) 2019 revenue of $5 billion or less. The borrower cannot be insolvent and must have a pass rating if it has existing loans with the lender. A company that participated in the Paycheck Protection Program (PPP) or received funds from the Economic Injury Disaster Loan program may also obtain a Main Street loan. However, a business cannot participate if it has “otherwise received adequate economic relief in the form of loans or loan guarantees provided under the Coronavirus Economic Stabilization Act of 2020.” Further, the company cannot be an “ineligible business,” which includes those engaged in the business of lending, certain passive businesses owned by developers and landlords, life insurance companies, and speculative businesses.

What are the different types of loans?

There are three separate loan facilities under the Main Street program. The Federal Reserve Bank of Boston (FRB Boston) is administrating the program and has released a term sheet for each loan. The loans have the same basic terms: five-year maturity with principal payments deferred during the first two years (interest payments deferred from one year), an interest of the London Inter-bank Offered Rate (LIBOR) plus 3%, and no prepayment penalty. Further, unlike PPP loans, all Main Street loans are full recourse and not forgivable.

Main Street offers three different loan products: a “New” Loan Facility; a “Priority” Loan Facility; and an “Expanded” Loan Facility. The New Loan product offers amounts between $250,000 and $35 million, with the amount not to exceed four times a borrower’s 2019 adjusted earnings before interest, taxes, depreciation and amortization (EBITDA). Priority Loans will be in the range of $250,000 to $50 million but can be for up to six times a borrower’s 2019 adjusted EBITDA. An Expanded Loan is a new tranche of pre-existing debt in an amount up to six times a borrower’s 2019 adjusted EBITDA between $10 million and $300 million. Borrowers with negative 2019 adjusted EBITDA are not eligible for Main Street loans. Additionally, Main Street loans cannot be for less than the minimum amounts identified.

For what purposes can funds be borrowed?

The borrower may use Main Street loan proceeds in the ordinary course of its business. However, the borrower must make commercially reasonable efforts to maintain its payroll and retain its employees while the Main Street loan is outstanding.

How does a company apply for a loan?

A business interested in obtaining a Main Street loan should inquire with its lender. The lender will apply its own underwriting standards when considering an application. The lender must utilize the same EBITDA methodology used when extending credit to similarly situated borrowers on or before April 24, 2020. The approval decision on the loan application will be made by the lender, not a government entity. To apply, a company will need audited financial statements, preferably for fiscal year 2019.

How will the loans be funded?

Financial institutions will issue Main Street loans directly to borrowers. Most U.S. financial institutions are eligible to be a lender under the program, however, lender applications are not yet being accepted. The lender will use its own loan documents that must be customized to reflect program requirements. The lender will be required to collect various certifications and covenants from the borrower but will not be required to independently verify the same. After origination, the lender will sell a participation in the loan of 95% to a special purpose vehicle (SPV) owned and operated by FRB Boston.

How will loans be serviced?

The originating lender will retain 5% of the loan and service it. An originating lender will not be expected to actively monitor ongoing compliance with covenants. However, if it becomes aware of a material misstatement or other covenant breach during the loan term, it must notify FRB Boston. In the event of restructurings or workouts, the borrower may be granted reductions in interest (including capitalized interest), extended amortization schedules and maturities, and other accommodations. The SPV and lender will share in any losses on a pari passu basis.

What loan and participation documents are currently available for review?

The key documents currently available on FRB Boston’s website include: (1) lender registration and certification forms; (2) participation agreements between the lender and SPV; and (3) required borrower certifications and covenants for each loan. Loan documents will be prepared by each lender.

Chuhak & Tecson attorneys are closely monitoring Main Street as it’s being rolled out and can assist with the preparation of loan documents. Should you have questions, please contact an attorney in the firm’s Banking group.

Client alert authored by Michael W. Debre (312 855 4603), Principal, and Christopher A. Pellegrini (312 855 4605), Associate.

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.