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Understanding the Main Street Lending Program

The Main Street Lending Program (MSLP) was launched on June 15 in order to facilitate the flow of credit to small- and medium-sized businesses that might otherwise be restricted by tightened COVID-19 lending conditions. The goal of the program, which is the first time the Federal Reserve has lent outside of the banking industry since the Great Depression, is to provide government funding to a broader scope of businesses (up to 15,000 employees or $5 billion in 2019 revenues) than those who had access previously through some of the relief packages offered by the US Department of Treasury. Funding under the program, which is not forgivable and will have to be paid back, is intended to help businesses maintain operational capacity and payroll as they work to overcome the negative effects of the pandemic and contribute to economic recovery on the other side.

With up to $600 billion in available funding under the program and loan sizes ranging from $250,000 to $300 million, business leaders are assessing their liquidity needs and capital stack and comparing those needs to the funding options offered by the program to determine if a Main Street loan is right for their business. In making this evaluation, decisionmakers should familiarize themselves with the general terms, certifications, and covenants associated with an MSLP loan and keep certain key considerations in mind.

How it works

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The Federal Reserve Bank of Boston has set up a special purpose vehicle (SPV) that will, as long as the loan’s requirements are met and the related documentation is complete and accurate, purchase 95% of participations in MSLP loans from lenders, up to $600 billion; thus absorbing most of the risk from lenders in an effort to free up their capacity to lend. A portion of the risk will be backed by a $75 billion equity investment by the Treasury (using CARES Act funds) into the SPV, while the lending institution will retain the remaining 5% of the risk associated with making the loan. Eligible lenders under the program are responsible for underwriting the loan, and, ultimately, it is the lender that determines whether a business is approved and for what amount.

There are three loan facility options under the MSLP, with the main differences relating to the maximum amounts that can be borrowed as well as restrictions on repayment of other debt.

Eligible lenders

Registration for eligible lenders (including, among others, federally insured banks, savings associations, or credit unions; US branches or agencies of foreign banks, and US bank holding companies) opened on June 15 to a tepid initial response. Per the Federal Reserve Bank of Boston, by June 19 (the last business day of its first week active), only 200 lending institutions had registered for the MSLP. This is in stark contrast to initial lender response to the Paycheck Protection Program (PPP) and many of the other previously introduced COVID-19 relief funding programs, for which the majority of big national and community banks alike mobilized quickly to participate at the risk of looking callous otherwise. The Fed expects registration to pick up as lenders speak with interested borrowers and further familiarize themselves with program terms; however, due to complexity of the program and associated lender retention risk, certain of the banks that do decide to participate in the program may still only consider underwriting MSLP loans to businesses with whom they have an existing relationship.

Business leaders who are considering participating in the MSLP should reach out to their current lending relationships to see if they are participating and, if not, should begin building relationships with other eligible lenders to get a clear understanding of their underwriting processes. Borrowers should understand that the program’s term sheets are meant as the minimum associated with applying for an MSLP loan; lenders are expected to apply their own underwriting standards in evaluating the creditworthiness of a borrower.

Key borrower considerations

One of the main drivers of lending institutions’ plans to participate in the MSLP will be borrower demand. With credit being an ongoing risk as the pandemic passes and until the economy gets back on its feet, available funding under the Main Street Lending Program—including its basis for determination of eligibility and loan size on 2019 financial records—provides an attractive option to many businesses. Further, although borrowers under the MSLP are encouraged to retain and/or hire back employees that have been laid off, Main Street loans can be used to fund any business expense necessary to “maintain operations.”  Under the Priority Loan Facility (PLF), businesses can even use loan proceeds to refinance existing debt with another lender at the time of origination of the MSLP loan.

Borrower certifications

To be eligible for an MSLP loan, the borrowing business must certify that:

  • It has provided financial records to the lender, and a calculation of 2019 adjusted EBITDA, reflecting only agreed-upon adjustments true and correct in all material respects, and that such financial records fairly present, in all material respects, the financial condition of all entities for the period covered in accordance with US GAAP (if applicable), consistently applied.
    • For any Main Street Loan originated after June 28, the borrower is required to also submit financial data related to the most recent quarter available.
  • It is unable to secure “adequate credit accommodations” because the amount, price, or terms of credit available from other sources are inadequate to meet their business needs.
  • As of the date of the loan (or upsize in the case of the Expanded Loan Facility, or ELF) and after giving effect to the loan or upsize, the borrower has the ability to meet its financial obligations for at least the next 90 days and does not expect to file bankruptcy during that time period.

Businesses will need to have clean, accurate, and complete financial information ready to go at time of application for a Main Street loan. Further, borrowers will need to provide detailed evidence of the need for funding, as well as an expectation of meeting financial obligations for the next 90 days, which will require liquidity and forward-looking business models sophisticated enough to satisfy the lending institution’s typical standards.

Affiliation rules

While intended to make accessible government funding to businesses that were either ineligible or didn’t receive it under some of the other programs, the MSLP’s affiliation rules could add significant complexity to the loan application process and will continue to restrict or limit access for many. A borrower’s eligibility to participate in the program, the type of loan in which they can participate, and the maximum allowable amount of funding for which they may be eligible, are all impacted by, where applicable, the borrower’s entire consolidated affiliated group of companies.

The MSLP utilizes the affiliation standards set forth in Small Business Administration (SBA) regulation 13 CFR121.301(f), which provides “concerns and entities are affiliates of each other when one controls or has the power to control the other, or a third party or parties controls or has the power to control both. It does not matter whether control is exercised, so long as the power to control exists.” The regulation provides seven tests for affiliation, including (1) affiliation based on ownership, (2) affiliation based on stock options, convertible securities and agreements to merge, (3) affiliation based on common management, (4) affiliation based on identify of interest, (5) affiliation based on the newly organized concern rule, (6) affiliation based on totality of circumstances and (7) affiliation based on franchise agreements.

Meeting the program’s affiliation rules could require significant analysis and coordination across affiliated entities. Businesses with more than one affiliated entity considering applying for funding under the program need to move quickly and methodically to organize this effort.

Direct loan restrictions

The MSLP places certain restrictions on borrowers’ compensation, stock repurchases and capital distributions:

  • Compensation limits are in place until twelve months after the loan is repaid in full, for officers and employees of the borrower that exceed $425,000; additional compensation limits exist for employees and officers whose compensation exceeds $3 million.  Restrictions do not apply to any employee whose compensation is determined through an existing collective bargaining agreement entered into prior to March 1, 2020.
  • For borrowers that have equity securities listed on a national exchange, a borrower must commit to not repurchase its own equity security until twelve months after the date on which the loan is repaid in full. Borrowers must also commit to not repurchase an equity security issued by any of its parent companies listed on a national exchange until the loan is no longer outstanding. These restrictions do not apply to a contractual obligation in effect as of March 27, 2020.
  • Until 12 months after the date on which the loan is no longer outstanding, a borrower must agree not to pay dividends or make other capital distributions with respect to its common stock equivalents, including any discretionary dividend payments. These restrictions do not apply to mandatory or preferential payment of dividends or other distributions for which both the equity interest and the obligation to pay dividends or distributions existed as of March 27, 2020.
    • Excluded from this restriction are distributions made by S-corporations or other tax passthrough entities to the extent reasonably required to cover their owners’ tax obligations with respect to such entities’ earnings.

Public disclosure

The Fed has communicated that it will disclose to the public certain information regarding the Main Street lending facilities on a monthly basis throughout the duration of operation of the facilities, including but not limited to names of borrowers, amounts borrowed and interest rates charged. This could prove a favorable feature to many potential borrowers, as well as taxpayers, in light of concerns over many small businesses in need of funding having been shut out of the PPP.  However, private businesses that receive MSLP funding will have to weigh their need for the cash against any optics that may be associated with receiving funding under the program.

Ongoing reporting requirements

Borrowers will be required to provide substantial ongoing financial and other reporting on a quarterly and annual basis associated with the MSLP, including balance sheet and income statement data, EBITDA adjustments, dividends, covenant status and more.  Annual reporting requirements are the same across loan facilities, while quarterly reporting requirements for the ELF are more robust due to its higher associated minimum and maximum loan amount. Borrowers should review these requirements to ensure they have the reporting systems and processes in place necessary to comply.

Private equity considerations

While private equity firms are excluded from the list of eligible businesses under the program, the broader size eligibility requirements allowed under the MSLP could, in theory, make government funding an option to private equity portfolio companies that were previously restricted out due to size limits. However, if more than one portfolio company of an entire private equity firm wants to apply for a loan under the MSLP, the application of the program’s affiliation rules could result in all portfolio companies, including those across funds within the same private equity firm, having to aggregate their information for purposes of determining the portfolio company’s size eligibility under the program, as well as the type and amount of Main Street loan for which the portfolio company may be eligible.  Affiliation will have to be thoroughly analyzed for each private equity portfolio company that wishes to participate in the MSLP. Further, portfolio companies will have to establish that they are unable to secure adequate funding to meet their needs from other sources, including the private equity firm.


Still to come

Since originally introducing the Main Street Lending Program on April 9, the Fed continues to request feedback from businesses and lenders on program terms, and has made changes along the way accordingly in an effort to get it right. Certain small businesses and lenders are asking for a lower minimum loan amount to make the program more accessible, while others are urging for relaxed documentation requirements.  In fact, on June 15, the same day the New Loan Facility (NLF), PLF and ELF opened up for lender registration under the MSLP, the Fed also announced that it is seeking public feedback until June 22 on a proposal to, under two additional loan facility options, expand the program to provide credit access to nonprofit organizations.

At present, the MSLP SPV is scheduled to purchase participations in MSLP loans through September 30, 2020; however, that date could extend. Eligible businesses should do a careful liquidity analysis, enabling them to understand any holes and appropriately size the ask under the best loan facility to meet their needs. If interested in participating in the Main Street Lending Program, businesses should start having conversations with their lenders and trusted advisors to ensure they get this process right.

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