Federal Reserve issues preliminary Main Street Loan Program details

On April 9, 2020, the Federal Reserve announced the next step in Federal support for the economy by releasing preliminary details for the Main Street Lending Program (MSLP). The MSLP is a program authorized under Title IV of the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act). The announcement did not identify any timing or specific program implementation process, but the announcement provides details describing the general parameters of the program. The Federal Reserve also issued information about the primary and secondary market corporate credit facilities and the Term Asset-Backed Securities Loan Facility, which are all necessary to support the credit to be extended by the Federal Reserve in connection with the business loan programs. The Federal Reserve will establish a special purpose entity that will purchase 95% of any eligible loan and the commercial lender that lent the money will retain 5% of each loan, sharing risk as well.

Similar to the Paycheck Protection Program, the MSLP will be administered through institutional lenders and U.S. savings and loans.

The Federal Reserve’s announcement about the MSLP listed the following program details:

• Eligible borrowers must have no more than 10,000 employees (no minimum number is specified) or more than $2.5 billion in 2019 annual revenues
• Eligible borrowers must be an entity created or organized in the U.S. or under U.S. laws, with significant operations and a majority of employees in the U.S.
• Loans will have 4 year maturity
• Minimum loan size will be $1 million and maximum loan size will be the lesser of (i) $25 million and (ii) an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed four times the borrower’s 2019 earnings before interest, taxes, depreciation, and amortization (EBITDA)
• Loan interest rates will be an adjustable rate based upon the Federal Reserve’s secured overnight financing rate plus 250 to 400 basis points

Borrowers will need to make certifications to obtain the loans, including the following:

• The borrower must commit to refrain from using the proceeds of the loan to repay other loan balances.
• The borrower must 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 new MSLP loan in full.
• The borrower must attest that it will not seek to cancel or reduce any of its outstanding lines of credit with the MSLP lender or any other lender.
• The borrower must attest that it requires financing due to the exigent circumstances presented by the COVID-19 pandemic and that, using the proceeds of the loan, it will make reasonable efforts to maintain its payroll and retain its employees during the term of the loan.
• The borrower must attest that it meets the EBITDA leverage condition used to calculate the maximum loan amount.
• The borrower must attest that it will follow the compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act.
• The borrower will be required to certify that the borrowing entity is eligible to participate in the MSLP, including in light of the conflicts of interest prohibition in section 4019(b) of the CARES Act.

The release stated that a 1% facility fee will need to be paid to the Federal Reserve’s special purpose entity, with either the lender or borrower paying the fee. Lenders may require borrowers to pay it. Additionally, borrowers must pay an origination fee equal to 1% of the principal amount of the Loan. New advances under the MSLP will end on September 30, 2020. Borrowers should expect that future Federal Reserve releases will include additional program requirements.

Since the Federal Reserve’s release provided no dates regarding the start of the MSLP, nor many of the additional loan details necessary for the program, businesses interested in the MSLP may be frustrated. As the Federal Reserve and Treasury learned during the TARP program administered by Treasury starting in 2008, it takes more time to launch a detailed economic relief program than initially expected. And as Treasury and the SBA discovered during the launch of the PPP, premature release of incomplete information also creates confusion in the relevant markets. As a result, we anticipate that the Federal Reserve will try to take sufficient time to work out MSLP details before a specific timeline is released.

Businesses potentially interested in the MSLP may want to contact their existing lenders to inquire about preliminary loan information, but should not have an expectation of loan applications being submitted in the immediate future. We will provide updated information about the MSLP as it becomes available. Businesses should also use the preliminary information to work with their advisors to develop a comprehensive financing strategy for their particular situation.