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 (with up to 15,000 employees or $5 billion in 2019 revenues) that were in sound financial condition before the pandemic but might now otherwise be restricted to funding due to tightened COVID-19 lending conditions. The MSLP 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.
Compared to the Paycheck Protection Program (PPP), which issued $350 billion in funding in less than two weeks in its first round in early April, the MSLP has been relatively slow to gain participation from borrowers and lenders alike. In contrast to the PPP, MSLP loans are not forgivable and must be paid back; further, MSLP terms are more complex than those under the PPP. However, with available funding ranging from minimum loan size of $250,000 to a maximum of $300 million (versus an average loan size of $114,000 under the PPP), business leaders are carefully 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.
How it works
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 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.
The MSLP operates through five facilities. The original three facilities – the New Loan Facility (NLF), Priority Loan Facility (PLF) and the Expanded Loan Facility (ELF) – provide funding options to for-profit businesses. The main differences between the NLF, PLF and ELF relate to the maximum amounts that can be borrowed (up to 4x and 6x FY 2019 adjusted EBITDA less existing outstanding and undrawn available debt), as well as restrictions on repayment of the borrower’s existing outstanding debt. MSLP loans, priced at LIBOR plus 3%, have five-year maturities with no interest owed during year one and no principal payments owed during the first two years.
On July 17, a month after the for-profit facilities went live, two additional loan options were introduced by the Fed to support greater access to credit for nonprofit organizations as well. The Nonprofit New Loan Facility (NNLF) and the Nonprofit Expanded Loan Facility (NELF) share many of the same characteristics as the for-profit facilities but are not yet operational as the Fed prepares itself for execution of the expanded program. This discussion focuses on the loan options available to for-profit entities only; any reference to the MSLP is meant to reference the NLF, PLF and ELF for-profit loan facilities.
Key borrower considerations
With credit being an ongoing risk as the pandemic passes and until the economy gets back on its feet, the Main Street Lending Program—including its basis for determination of eligibility and loan size on 2019 financial records—provides an attractive funding option to many businesses. Decisionmakers should familiarize themselves with the program’s general terms, certifications, and covenants and keep certain key considerations in mind when evaluating whether the MSLP could help meet their liquidity needs.
Certifications and covenants
To be eligible for an MSLP loan, the borrowing business must certify that (among other requirements):
- 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 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.
- An MSLP loan must be senior to or pari passu (on equal footing) with the borrower’s other loans or debt instruments, excluding mortgage debt, the time of loan origination and at all times thereafter throughout the life of the MSLP loan. Funding under each MSLP facility can be secured or unsecured, with certain restrictions and requirements specific to each facility.
- Principal and interest payments related to existing and outstanding debt are permitted when they are “mandatory and due” in accordance with a pre-existing schedule. Any required prepayments associated with existing and outstanding debt that are triggered by the incurrence of new debt can only be paid if such prepayments are de minimis.
- This could require multi-lender consent if a borrower holds existing and outstanding debt with more than one lender, adding complexity to the process.
- The MSLP utilizes the affiliation standards set forth in SBA regulation 13 CFR121.301(f). 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 could be eligible, are all impacted by, where applicable, the borrower’s entire consolidated affiliated group of companies. The MSLP’s affiliation rules could require significant analysis and coordination, and will continue to restrict or limit access for many. Businesses with more than one affiliated entity considering applying for funding under the program need to move quickly and methodically to organize this effort.
MSLP lenders are not expected to independently verify borrowers’ information and will instead rely on the certifications, covenants and self-reporting provided by borrowers. Businesses will need to clearly understand how the affiliation rules apply to their business and have clean, accurate, and complete financial information ready to go at time of application for a Main Street loan. 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. Further, any inter-lender consent related to existing debt (as applicable) will have to be obtained.
Use of proceeds
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.”
- Throughout the life of an MSLP loan, borrowers may use MSLP funds received to refinance debt that is maturing within 90 days, with any lender. Only under the Priority Loan Facility (PLF), however, is refinancing permitted at the time of MSLP loan origination; further, only at origination of a PLF loan is a company permitted to refinance debt with any maturity date (as long as that debt is not with the PLF lender).
- 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.
- Borrowers must commit to not repurchase their own equity security listed on a national exchange (as applicable), or that of any of its parent companies until twelve months after the date on which the loan is repaid in full. Restrictions do not apply to a contractual obligation in effect as of March 27, 2020.
- Borrowers must agree not to pay dividends or make other capital distributions with respect to common stock equivalents, including any discretionary dividend payments, until twelve months after the date on which the loan is repaid in full. 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.
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.
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.
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 make government funding an option to private equity portfolio companies that were previously restricted out due to size limits. There are certain key considerations specific to private equity firms and their portfolio companies that should be considered as they assess liquidity needs.
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) were originally slow to register for and begin lending under the MSLP; however, as borrower demand has begun to pick up, so has lender participation. 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 5% risk retained by an MSLP lender, 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 also other banks that plan to participate in the program and accept new customers but did not wish to be listed publicly.
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.
Still to come
Since originally introducing the Main Street Lending Program on April 9, the Fed continues to request feedback on program terms, and has made changes accordingly along the way. Certain interested parties are asking for a lower minimum loan amount to make the program more accessible, while others are urging for relaxed documentation requirements. Many asset-based borrowers are excluded from the program due to its reliance on EBITDA and leverage ratios as they key metric for underwriting MSLP loans. The Federal Reserve and Treasury Department have communicated that they will continue to evaluate the program and make future adjustments as they deem appropriate.
On July 28, the Fed extended the program through the end of the year; at present, the Main Street SPV is scheduled to purchase up to $600 billion in MSLP loans through December 31, 2020. Eligible businesses should do a thorough 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.