Published: May 19th, 2020 at 08:05 AM PST | Updated: June 11th, 2020 at 2:17 PM PST
By now, everyone has heard of PPP loan program under the CARES Act. However, not all companies qualify for this loan, and given the changes in the “good faith” certification requirement, not all companies are comfortable with obtaining PPP. However, not very many are aware of a relatively new loan called the Main Street Loan. Companies that had good financial standing prior to COVID-19 should explore this loan.
On April 9, 2020, the Federal Reserve Board and the Treasury Department announced the establishment of the Main Street Lending Program to help facilitate roughly $600 billion in financing to small and mid-sized businesses, including not-for-profit organizations. The primary objective of the Main Street Lending Program is to promote liquidity in the lending market for small to medium-sized businesses through five-year loans with favorable terms and an extended payment plan. Following the announcement on April 9, the Federal Reserve issued additional details and terms on April 30, 2020. Prior to the launch of the program the Fed enacted a number of changes, announced June 8, to make the program more accessible for smaller businesses.
Now, is the Main Street Lending Program a feasible option for your business? It’s time to find out.
What’s in this article?
- What is the Main Street Lending Program?
- Overview of the Program
- Who is eligible for the Main Street Lending Program?
- How much can I borrow?
- What are the rate and terms of the loan?
- What certifications must an eligible borrower make?
- Is there a fee to obtain the loan?
- Who qualifies as an eligible lender?
- How long will the Main Street Program be in effect?
- Are there any restrictions on the use of the funds?
- What is the effect of the restriction that MSNLF Loans cannot be “contractually subordinated in terms of priority” to other loans or debt instruments?
- Should I talk to my current banker regarding this loan or should I seek another bank?
- If I applied for a loan under the PPP, is the Main Street Lending Program still an option?
- How is the Main Street Lending Program different from the Paycheck Protection Program?
- How can Squar Milner help?
What is the Main Street Lending Program?
Through Title IV of the Coronavirus Aid, Relief, and Economic Security (CARES) Act enacted on March 27, 2020, a subtitle provision called the Coronavirus Economic Stabilization Act of 2020, provided additional emergency relief to certain businesses and not-for-profit organizations that may not meet the required standards of the Paycheck Protection Program (PPP) or other types of assistance under the CARES Act.
From this subtitle provision emerged the Main Street Lending Program.
The Main Street program offers five-year loans to businesses that meet specific criteria and were in good financial standing before the COVID-19 pandemic struck. Businesses that have utilized the PPP may also take out loans under this program. In addition, principal and interest payments for a Main Street loan will be deferred for two years (updated June 8; previously one year). Businesses who seek the loans must commit to making commercially reasonable efforts to maintain payroll and retain workers.
The Main Street Lending Program consists of three sub-programs:
- Main Street New Loan Facility (MSNLF)
- Main Street Priority Loan Facility (MSPLF)
- Main Street Expanded Loan Facility (MSELF)
*Note: You can only participate in one of the Main Street loan facilities. Also, companies that participate in the Main Street Lending Program cannot participate in the Primary Market Corporate Credit Facility.
Who is eligible for the Main Street Lending Program?
Who is eligible for the Main Street Lending Program?
To qualify for the Main Street Lending Program, eligible borrowers must meet the following criteria:
- Must not have received specific support pursuant to the Coronavirus Economic Stabilization Act of 2020 (Subtitle A of Title IV of the CARES Act). This means, a business is ineligible if it has received support pursuant to section 4003(b)(1)-(3) of the CARES Act.
- Have up to 15,000 employees or up to $5 billion in 2019 annual revenues (employees and revenues must be aggregated with the employees and revenues of affiliated entities)
- Must be a business established prior to March 13, 2020 and created or organized in the United States or under laws of the United States, with significant operations in and a majority of its employees based in the U.S.
- Must not be an ineligible business as listed in 13 CFR 120.110 (b)-(j), (m)-(s), as modified and clarified by the U.S. Small Business Administration (SBA) for purpose of PPP on or before April 24, 2020
- Must make all of the certifications and covenants required under the program
How much can I borrow?
Loans in the New Loan Facility and Priority Loan Facility have a minimum amount of $250,000. The maximum loan size in the MSNLF is the lesser of $35 million or four (4) times the borrower’s 2019 adjusted earnings before interest, taxes, depreciation and amortization (EBITDA). For the Priority Loan Facility, the maximum loan size is the lesser of $50 million or six (6) times the borrower’s 2019 adjusted EBITDA.
The Expanded Loan Facility has a minimum loan size of $10 million and a maximum loan size that is the lesser of $300 million or an amount that does not exceed six (6) times that borrower’s 2019 adjusted EBITDA.
What are the rate and terms of the loan?
Main Street facility loans are a four-year maturity at LIBOR plus 3%.
Borrowers may defer payments for two (2) years, while any unpaid interest will be capitalized. For each of the three loan facilities, the loan will be amortized over the remaining term of the loan with 15% of principal due at the end of each of years 3 and 4, and 70% due at maturity at the end of year 5. In addition, prepayment is permitted without penalty.
What certifications must an eligible borrower make?
In addition to other certifications required by applicable statutes and regulations, an eligible borrower must make the following certifications:
- The borrower must commit to refrain from repaying the principal balance of, or paying any interest on, any debt until the Main Street loan (or the upsized tranche of the loan under the MSELF) is repaid in full, unless the debt or interest payment is mandatory and due. (See the note below regarding variance with the Priority Loan Facility.)
- The borrower must commit that it will not seek to cancel or reduce any of its committed lines of credit with their Main Street lender or any other lender.
- The borrower must certify that it has a reasonable basis to believe that, as of the date of origination of the Main Street loan and after giving effect to such loan, it has the ability to meet its financial obligations for at least the next 90 days and does not expect to file for bankruptcy during that time period.
- The borrower must commit 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, except that an S corporation or other tax pass-through entity that is an eligible borrower may make distributions to the extent reasonably required to cover its owners’ tax obligations in respect to the entity’s earnings.
- Borrowers must certify that it is eligible to participate in the Facility, including in light of the conflicts of interest prohibition in section 4019(b) of the CARES Act.
Note: While most of the certifications and covenants are the same for each of the three sub-programs, there is a variation. The MSPLF includes a modification to the eligible borrower covenant regarding debt repayment to allow an eligible borrower to refinance existing debt owed to a lender that is not their Main Street loan lender at the time the MSPLF is originated.
Is there a fee to obtain the loan?
In short, yes, there are fees associated with Main Street loans. Lenders will owe a facility fee of 100 basis points of the principal amount of the loan (New Loan Facility & Priority Loan Facility). In addition, the eligible borrower will pay the eligible lender a fee of up to 100 basis points of the principal amount at the time of origination. Lenders maintain discretion over whether and when to charge eligible borrowers this fee.
For the Expanded Loan Facility, eligible lenders will pay the Main Street SPV a transaction fee of 75 basis points of the principal amount of the MSELF Upsized Tranche at the time of upsizing, and may choose to pass this fee to eligible borrowers. In addition, the eligible borrower will pay an eligible lender a fee of up to 75 basis points of the principal amount of the MSELF Upsized Tranche at the time of upsizing. Eligible lenders can decide whether and when to charge eligible borrowers this fee.
The SPV will pay an eligible lender 25 basis points of the principal amount of its participation per annum for loan servicing.
Who qualifies as an eligible lender?
Per the guidance of the Federal Reserve, an eligible lender includes U.S. federally-insured depository institutions (including banks, savings associations, and credit unions), U.S. branches or agencies of foreign banks, U.S. bank holding companies, U.S. savings and loans holding companies, U.S. intermediate holding companies of foreign banking organizations, or any U.S. subsidiary of any of the foregoing.
Commercial lenders will be responsible for underwriting, documenting and funding loans under the Main Street Lending Program, and prospective borrowers may seek to leverage existing banking, lending and financing relationships to seek such loans.
How long will the Main Street Program be in effect?
All three loan facilities under the Main Street Lending Program are set to expire on September 30, 2020, unless the Board of Governors of the Federal Reserve System and the Treasury Department extend them.
Are there any restrictions on the use of the funds?
The proceeds of these loans will not be used to repay or refinance pre-existing loans or lines of credit made between the eligible lender and eligible borrower. Furthermore, the proceeds cannot be used to pay other loan balances, including other debt of equal or lower priority, with the exception of mandatory principal payments, unless the eligible loan is paid in full.
What is the effect of the restriction that MSNLF Loans cannot be “contractually subordinated in terms of priority” to other loans or debt instruments?
An MSNLF Loan, at the time of origination or at any time during its term, may not be contractually subordinated in terms of priority to the eligible borrower’s other loans or debt instruments. This means that an MSNLF Loan may not be junior in priority in bankruptcy to the Eligible Borrower’s other unsecured loans or debt instruments. This provision does not prevent:
- the issuance of an MSNLF Loan that is a secured loan (including in a second lien or other capacity) to an Eligible Borrower, whether or not the Eligible Borrower has an outstanding secured loan of any lien position or maturity;
- the issuance of an MSNLF Loan that is an unsecured loan to an Eligible Borrower, regardless of the term or secured or unsecured status of the Eligible Borrower’s existing indebtedness; or
- the Eligible Borrower from taking on new secured or unsecured debt after receiving an MSNLF Loan, provided the new debt would not have higher contractual priority in bankruptcy than the MSNLF Loan.
Should I talk to my current banker regarding this loan or should I seek another bank?
Companies should start with their current bank due to the “contractually subordinated in terms of priority” requirement discussed above. Their existing loan terms might need to be modified. If there are no existing loans or debt instruments, companies can talk to either their existing bank or a new one.
How is the Main Street Lending Program different from the Paycheck Protection Program?
While both the Paycheck Protection Program and the Main Street Lending Program were designed to assist companies adversely affected by the coronavirus pandemic, they do provide liquidity to different sized companies in different ways:
- At this point in time, any loan under the Main Street Lending Program will not be eligible for partial or full loan forgiveness. This, of course, is a striking difference between the Main Street Lending Program and the Paycheck Protection Program.
- The loan terms under the PPP (portion that is not forgiven) and Main Street, such as duration, payment terms and interest, differ. It is important to refer to the terms sheets issued by the Fed to note the Main Street details.
- Another differentiating factor is the amount of the loan. The Main Street original loan amount is not tied to payroll, unlike a PPP loan.
- Eligible borrowers: (1) Financial Standing. The Main Street program is only available for businesses that were in a good financial standing before the COVID-19 crisis. The PPP loan does not carry such a requirement. (2) Employee count. For the Main Street program, all businesses up to 15,000 employees are eligible, including businesses with 500 or fewer employees. The PPP, on the other hand, was designed primarily for businesses with 500 or fewer employees.
- Both the PPP and Main Street New Loan are unsecured. The Expanded Loan Facility requires the loan to be secured if the original loan was secured.
How can Squar Milner help?
The success of your business is important to us. We have highly skilled and technical professionals who have diligently studied and understand the complexities of the Main Street Lending Program. If you were unable to utilize a PPP loan, let’s find out if the Main Street program is a feasible option for you and your business. We are able and willing to answer any questions you may have regarding this particular program or any other components of the CARES Act.
Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.