CLIENT ALERT
By: Margaret Probish
April 19, 2020
On April 9, 2020 the Federal Reserve announced two so-called “Main Street” loan programs to address the economic impact of COVID-19 on mid-sized business including the Main Street New Loan Facility and the Main Street Expanded Loan Facility. In its announcement the Federal Reserve detailed the terms of the programs, as summarized below, but it is important to keep in mind the Federal Reserve also noted the terms are subject to adjustment based on input received during a comment period which concluded on April 16, 2020. We strongly recommend that businesses seeking financing through these programs remain in close touch with their lenders as these programs are implemented.
According to the Federal Reserve, a Federal Reserve Bank will commit to lend to a single common special purpose vehicle, or “SPV,” on a recourse basis in order to fund the Main Street programs. The SPV will purchase 95% participations in the eligible new loans and tranches described below, while the lenders originating the facilities will retain 5% of each. The SPV will cease purchasing participations on September 30, 2020, unless the Federal Reserve and the Treasury Department extend the programs. The Department of the Treasury, using funds appropriated through the CARES Act, will make a $75 billion equity investment in the single common SPV in connection with the programs. The combined size of the Main Street programs will be up to $600 billion.
Main Street New Loan Facility
Loans eligible for the Main Street New Loan Facility (the term sheet is here) include those originated on or after April 8, 2020 by an eligible lender, which include U.S. insured depository institutions, with the following terms:
- Unsecured;
- 4 year maturity;
- Amortization of principal and interest deferred for one year;
- Adjustable rate of the secured overnight financing rate + 250-400 basis points;
- Minimum loan size of $1 million;
- Maximum loan size that is the lesser of
(i) $25 million or
(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”); and - Prepayment permitted without penalty.
Other conditions include that the borrower cannot use the proceeds of the loan to repay other loan balances, and must commit to refraining from repaying other debt of equal or lower priority, with the exception of mandatory principal payments, unless the borrower has first repaid the 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 lender or any other lender (the lender is also prohibited from canceling or reducing any existing lines of credit outstanding to the borrower). Also, the borrower must attest that it requires the loan 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.
Main Street Expanded Loan Facility
Existing loans eligible for the Main Street Expanded Loan Facility program (the term sheet is here) include loan facilities with committed but undrawn debt which are drawn through an additional tranche made on the terms summarized below, which are funded on or after April 8, 2020 at par value by an eligible lender, which includes U.S. insured depository institutions:
- 4 year maturity;
- Amortization of principal and interest deferred for one year;
- Adjustable rate of secured overnight financing rate + 250-400 basis points;
- Minimum loan size of $1 million;
- Maximum loan size that is the lesser of (i) $150 million, (ii) 30% of the borrower’s existing outstanding and committed but undrawn bank debt, or (iii) an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed six times the borrower’s 2019 earnings before interest, taxes, depreciation, and amortization (“EBITDA”); and
- Prepayment permitted without penalty.
As with the Main Street New Loan Facility, other conditions include that the borrower cannot use the proceeds of the tranche to repay other loan balances, and must commit to refraining from repaying other debt of equal or lower priority, with the exception of mandatory principal payments, unless the borrower has first repaid the 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 lender or any other lender (the lender making the increase is also prohibited from canceling or reducing any existing lines of credit outstanding to the borrower). Also, the borrower must attest that it requires the tranche due to the exigent circumstances presented by the COVID-19 pandemic, and that, using the proceeds of the tranche, it will make reasonable efforts to maintain its payroll and retain its employees during the term of the tranche.