On April 30th, 2020, the Federal Reserve Board announced it is expanding the scope and eligibility for the Main Street Lending Program previously announced on April 9th. As part of its broad effort to support the economy, the Federal Reserve developed the Main Street Lending Program to help credit flow to small and medium-sized businesses that were in sound financial condition before the pandemic. When the initial terms of the Program were announced, the Board indicated that, because the financial needs of businesses vary widely, it was seeking feedback from the public on potential refinements. More than 2,200 letters from individuals, businesses, and nonprofits were received. In response to the public input, the Board decided to expand the loan options available to businesses and increased the maximum size of businesses that are eligible for support under the Program. The changes include:
- Creating a third loan option, with increased risk sharing by lenders for borrowers with greater leverage;
- Lowering the minimum loan size for certain loans to $500,000; and
- Expanding the pool of businesses eligible to borrow
Additionally, businesses with up to 15,000 employees or up to $5 billion in annual revenue are now eligible, compared to the initial program terms, which were for companies with up to 10,000 employees and $2.5 billion in revenue. The minimum loan size for two of the options was also lowered to $500,000 from $1 million. With these changes, the Program will now offer more options to a wider set of eligible small and medium-sized businesses. The combined size of government funding for the Program will be up to $600 billion.
Like the Paycheck Protection Program (PPP) and the Primary Market Corporate Credit Facility (PMCCF), the Main Street Facilities were created to assist companies that have been adversely affected by the COVID-19 pandemic. Each of these programs, however, was developed to provide liquidity to companies of different sizes:
- PPP – The PPP was established by the CARES Act and implemented by the Small Business Administration (SBA) to support the payroll and operations of small businesses through the issuance of government-guaranteed loans that include a forgiveness feature for borrowers that satisfy the requirements of the PPP.
- Main Street Loan Program – The Federal Reserve designed Main Street to support small and medium-sized businesses that were unable to access the PPP or that require additional financial support after receiving a PPP loan. Main Street loans are not forgivable.
- PMCCF – The Federal Reserve established the PMCCF to support large companies through the purchase of eligible corporate bonds from, and lending through syndicated loans to, large companies. PMCCF loans are not forgivable.
Below is a comparison of the three types of Main Street Loan Facilities:
|Main Street New Loan Facility (MSNLF)||Main Street Priority Loan Facility (MSPLF)||Main Street Expanded Loan Facility (MSELF)|
|Who are the lenders?|
|Eligible Lenders can be any of:
|Who is an eligible borrower?|
|An Eligible Borrower is a Business that:
|What is the definition of a Business?|
|What are the terms of the loans?|
|What are the additional terms and restrictions?|
|How are these loans funded?|
|The Federal Reserve Bank of Boston will lend to a single purpose vehicle (SPV) in which the Treasury Department will make a $75 billion equity investment with funds from the CARES Act|
|How do these affect other government back loans I received or have applied for?|
|Is there a loan forgiveness program?|
|When can I apply?|
|Federal Reserve is currently working to create the infrastructure necessary to operationalize the program. More information will be posted here as it becomes available regarding Program terms and how Eligible Lenders can sell Eligible Loan participations to the SPV. Once the program is operational, small and medium-sized businesses interested in the program should seek to apply for Program loans from an eligible lender.|
|How does this affect my current debt?|
- Under the MSNLF and MSPLF, the methodology used by the Eligible Lender to calculate adjusted 2019 EBITDA must be the methodology it has previously used for adjusting EBITDA when extending credit to the Eligible Borrower or similarly situated borrowers on or before April 24, 2020. Under the MSELF, the methodology used by the Eligible Lender to calculate adjusted 2019 EBITDA must be the methodology it previously used for adjusting EBITDA when originating or amending the Eligible Loan on or before April 24, 2020.
- Until 12 months after the loan is no longer outstanding, the borrower may not:
- participate in stock buybacks
- pay dividends or other capital distributions
- must comply with the limitations on compensation in Section 4004 of the CARES act which limits compensation to officers and employees
- Certain government and political officials and their respective families cannot participate in this program
- Ineligible Businesses include:
- Financial businesses primarily engaged in the business of lending, such as banks, finance companies, and factors (pawn shops, although engaged in lending, may qualify in some circumstances);
- Passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds (except Eligible Passive Companies under § 120.111);
- Life insurance companies;
- Businesses located in a foreign country (businesses in the U.S. owned by aliens may qualify);
- Pyramid sale distribution plans;
- Businesses deriving more than one-third of gross annual revenue from legal gambling activities;
- Businesses engaged in any illegal activity;
- Private clubs and businesses which limit the number of memberships for reasons other than capacity;
- Government-owned entities (except for businesses owned or controlled by a Native American tribe);
- Loan packagers earning more than one-third of their gross annual revenue from packaging SBA loans;
- Businesses with an Associate who is incarcerated, on probation, on parole, or has been indicted for a felony or a crime of moral turpitude;
- Businesses in which the Lender or CDC, or any of its Associates owns an equity interest;
- Businesses which:
- Present live performances of a prurient sexual nature; or
- Derive directly or indirectly more than de minimis gross revenue through the sale of products or services, or the presentation of any depictions or displays, of a prurient sexual nature;
- Unless waived by SBA for good cause, businesses that have previously defaulted on a Federal loan or Federally assisted financing, resulting in the Federal government or any of its agencies or Departments sustaining a loss in any of its programs, and businesses owned or controlled by an applicant or any of its Associates which previously owned, operated, or controlled a business which defaulted on a Federal loan (or guaranteed a loan which was defaulted) and caused the Federal government or any of its agencies or Departments to sustain a loss in any of its programs. For purposes of this section, a compromise agreement shall also be considered a loss;
- Businesses primarily engaged in political or lobbying activities;
- Speculative businesses (such as oil wildcatting).
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About the Author
Paren Knadjian, Practice Leader
Mergers & Acquisitions, Technology, PPP Forgiveness
Paren is the practice leader of the M&A and Capital Markets group at KROST. He comes with over 20 years of experience in mergers and acquisitions as well as equity and debt financings. In that time, Paren successfully completed over 200 M&A and Capital Markets transactions worth over $1 billion, acting as both a buy-side and sell-side advisor. » Full Bio