Main Street Lending Program

The Main Street Lending Program (MSLP) was launched by the Federal Reserve on June 15 and broadens size eligibility for government funding to include businesses with up to 15,000 employees or $5 billion in fiscal year 2019 revenues. The MSLP has been slow to gain momentum from borrowers and lenders in its first month, but with an economy experiencing the effects of what could still be the early stages of COVID-19, and a looming presidential election, lending money holds more risk. Additionally, low interest rates have caused lenders to realize lower margins on loans that are made. If the United States experiences a prolonged economic downturn or second wave of lockdowns, banks will become further strained, making the Fed’s promise to purchase 95% of the interest in MSLP loans from eligible lenders (as long as certain criteria are met) an economic backstop to support lending capacity.

As the MSLP gets underway, PE fund and portfolio company management should be aware of some of the associated benefits and roadblocks they could face.

• Benefits of the MSLP to PE portfolio companies
  MSLP loans have five-year maturities and floating interest rates at LIBOR plus 3%; no interest is owed during the first year of the loan and no principal payments are owed during the first two years. Such terms make MSLP loans especially attractive to companies with debt maturing within the next two years. Maximum loan size is up to 4x or 6x leverage multiples (depending on the MSLP facility), based on FY 2019 adjusted EBITDA less existing outstanding and undrawn available debt. Thus, the largely negative financial effects of the pandemic in recent fiscal periods are excluded from borrowers’ EBITDA calculation under terms of the MSLP.Borrowers can use funds received at the time of origination of an MSLP Priority Loan Facility (PLF) loan to refinance debt (regardless of maturity date) with any lender, as long as that debt is not with the PLF lender. Although under the program’s other two facilities offered to for-profit businesses refinancing of debt is not permitted at loan origination, borrowers may refinance debt with any lender that is maturing within 90 days throughout the life of the MSLP loan.Further, since Main Street loans are not forgivable and will have to be paid back, the optics around receiving funding under the MSLP are friendlier to certain businesses than those surrounding the PPP.

• Roadblocks to participation in the MSLP by PE portfolio companies
  An affiliated group of companies can participate in only one MSLP facility; thus, if more than one portfolio company of an entire PE firm wants to apply, the application of the affiliation rules could result in all portfolio companies having to aggregate their information to determine program eligibility and maximum loan amount. GPs and portfolio company management teams must understand how the affiliation rules apply to them, as it is the borrower’s responsibility to certify its eligibility to apply for an MSLP loan. Generally, affiliation exists when one business controls or has the power to control another, or when a third party (or parties) controls or has the power to control both businesses. Control can be affirmative or negative and may arise through ownership, management, or other relationships or interactions between parties. In the case of a PE portfolio company, minority shareholders that have the ability to prevent a quorum or block decisions are determined to have negative control and will therefore be considered affiliates of the company.Borrowers must certify that they are “unable to secure adequate credit accommodations from other banking institutions” to be eligible for an MSLP loan. Guidance clarifies that this doesn’t mean that no credit from other sources is available; rather it means that because the amount, price, or terms are inadequate, the borrower is unable to secure other adequate credit accommodations.MSLP debt is required to be senior to or pari passu with borrowers’ other debt. The program allows for other principal and interest payments that are mandatory and due; however, any prepayments triggered by the incurrence of new debt are only allowable under the program if such prepayments are de minimis. Requirements of pari passu sharing of existing senior debt collateral for certain MSLP facilities risks diluting the collateral position of existing lenders and will in many cases require their consent.Additionally, there are direct loan restrictions under the MSLP in which borrowers are not permitted to pay dividends or make other capital distributions with respect to common stock equivalents, including any discretionary dividend payments, until 12 months after the MSLP loan is no longer outstanding. However, if preferred stock or equity interest in a borrower provides for mandatory or preferential payment, payment of dividends and distributions is permitted as long as both the equity interest and the obligation to pay existed as of March 27, 2020.It is important to note that MSLP term sheets represent the minimum requirements for MSLP loans; lenders are expected to apply their own underwriting standards in evaluating the financial condition and creditworthiness of each borrower, and it is ultimately the lender who determines whether a borrower is approved for an MSLP loan and for what amount. The Fed has published a state-by-state list of lenders participating in the MSLP who are currently accepting applications from new customers. Due to the complexity of the program and the 5% risk retained by MSLP lenders, there are certain banks that plan to participate in the program but will only consider underwriting MSLP loans to businesses with whom they have an existing relationship. There are other banks that plan to participate in the program and accept new customers but did not wish to be listed publicly.Due to the MSLP’s use of EBITDA as the key metric for evaluating businesses’ eligibility for the program as well as maximum loan size, asset-based borrowers whose credit risk is not evaluated on the basis of EBITDA are at this time excluded from participating in the MSLP.