CARES Act Update – Federal Reserve and U.S. Treasury Establish Main Street Business Lending Program to Provide Liquidity to Mid-Size Businesses

April 13, 2020 | Insights



By Lindsey Berwick & John Wittenberg

The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides emergency economic stimulus to small businesses and certain eligible recipients in response to the economic distress caused by the COVID-19 pandemic. The Coronavirus Economic Stabilization Act of 2020 (CESA), at Title IV, Subtitle A of the CARES Act, authorizes the Secretary of the Treasury to, among other things, establish and administer a program of loans, loan guarantees, and other investments to provide liquidity to eligible businesses related to losses incurred as a result of coronavirus. On April 9, 2020, pursuant to CESA and Section 13(3) of the Federal Reserve Act, the Federal Reserve and the U.S. Treasury Department approved the establishment of a $600 billion Main Street Business Lending Program. This update summarizes the terms of the Main Street Business Lending Program, and outlines certain matters to be analyzed and considered with respect thereto.

Main Street Lending Program

On April 9, 2020, the Federal Reserve published term sheets for two new emergency-lending facilities under the Main Street Lending Program (MSLP):

  • Main Street New Loan Facility (MSNLF). The Federal Reserve will purchase new unsecured term loans originated on or after April 8, 2020, made by Eligible Lenders to Eligible Borrowers.
  • Main Street Expanded Loan Facility (MSELF). The Federal Reserve will purchase upsized tranches of existing loans originated before April 8, 2020, made by Eligible Lenders to Eligible Borrowers.
Program Basics
  • Eligible Lenders: U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies.  Non-bank lenders are currently not eligible to participate in the MSLP.
  • Eligible Borrowers:
    • Businesses with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues.
    • Businesses created or organized in the United States or under the laws of the United States with significant operations in and a majority of its employees based in the United States.
  • Participation Criteria: Eligible Borrowers:
    • may participate in the MSNLF or MSELF, but not both.
    • that participate in the MSNLF or MSELF may not also participate in the Primary Market Corporate Credit Facility.
    • participating in the MSNLF or MSELF may have also received a loan under the Paycheck Protection Program.
  • Mechanics; Risk Sharing: A single special purpose vehicle (SPV) will be established to finance loans made by Eligible Lenders to Eligible Borrowers. The SPV will purchase a 95% participation in an Eligible Loan at par value, and the Eligible Lender will retain (a) 5% of the Eligible Loan in the case of a MSNLF or (b) 5% of the upsized tranche of each Eligible Loan in the case of a MSELF. The SPV and the Eligible Lender will share risk on a pari passu basis.
  • Term: The SPV will cease purchasing participations in Eligible Loans on September 30, 2020, unless the Board and the Treasury Department extend the MSNLF. The Reserve Bank will continue to fund the SPV after such date until the SPV’s underlying assets mature or are sold.
Loan Terms and Fees
Main Street New Loan Facility Main Street Expanded Loan Facility
(solely with respect to the upsized tranche)
Min. Loan Amount $1 million $1 million
Max. Loan Amount The lesser of (a) $25 million or (b) an amount that, when added to the Eligible Borrower’s existing outstanding and committed but undrawn debt, does not exceed four times the Eligible Borrower’s 2019 earnings before interest, taxes, depreciation, and amortization (EBITDA) The lesser of (a) $150 million, (b) 30% of the Eligible Borrower’s existing outstanding and committed but undrawn bank debt, or (c) an amount that, when added to the Eligible Borrower’s existing outstanding and committed but undrawn debt, does not exceed six times the Eligible Borrower’s 2019 EBITDA
Interest Rate Adjustable rate of Secured Overnight Financing Rate (SOFR) + 250-400 basis points Adjustable rate of SOFR + 250-400 basis points
Term/Maturity 4 years 4 years
Payment Terms
Principal and Interest Principal and Interest
Payment Deferral 1 year 1 year
Security Unsecured Secured solely to the extent the existing loans are secured and, in such instances, upsized loans will be secured on a pari passu basis
Prepayment
Permitted without penalty Permitted without penalty
Origination Fee 100 basis points of the principal amount of the Eligible Loan, payable by the Eligible Borrower 100 basis points of the principal amount of the upsized tranche of the Eligible Loan, payable by the Eligible Borrower
Participation Fee
100 basis points of the principal amount of the loan purchased via participation, payable by the Eligible Lender to the SPV; but may be passed through to the Eligible Borrower None
Servicing Fee 25 basis points of the principal amount of the loan participation purchased by the SPV, payable by the SPV to the Eligible Lender on a per annum basis 25 basis points of the principal amount of the participation in the upsized tranche of the Eligible Loan purchased by the SPV, payable by the SPV to the Eligible Lender on a per annum basis
.
Certifications
  • Borrower: An Eligible Borrower must certify, among other things, with respect to the new loan or the upsized tranche, as applicable:
    • It is eligible to participate in the MSLP, including in light of the conflicts of interest prohibition in Section 4019(b) of the CARES Act.
    • It requires financing due to the exigent circumstances presented by the coronavirus disease 2019 (COVID-19) pandemic, and that, using the proceeds of the Eligible Loan, it will make reasonable efforts to maintain its payroll and retain its employees during the term of the Eligible Loan.
    • It meets the EBITDA leverage condition stated above.
    • It will follow compensation, stock repurchase, and capital distribution restrictions that apply to the direct loan programs under Section 4003(c)(3)(A)(ii) of the CARES Act (under the CARES Act, these restrictions apply for a period of one year after loan repayment).
    • It will refrain from using the proceeds of the Eligible Loan or upsized tranche, as applicable, to repay other loan balances.
    • It will refrain from repaying other debt of equal or lower priority, with the exception of mandatory principal payments, unless it has first repaid the Eligible Loan or upsized tranche, as applicable, in full.
    • It will not seek to cancel or reduce any of its outstanding lines of credit with the Eligible Lender or any other lender.
  • Lender: An Eligible Lender will be required to certify that, among other things, the following:
    • It is eligible to participate in the MSLP, including in light of the conflicts of interest prohibition in Section 4019(b) of the CARES Act.
    • The proceeds of the Eligible Loan will not be used to repay or refinance pre-existing loans or lines of credit made by the Eligible Lender to the Eligible Borrower.
    • It will not cancel or reduce any existing lines of credit outstanding to the Eligible Borrower.
Considerations
  • EBITDA: The Federal Reserve has not provided guidance on how EBITDA will be calculated. Since a borrower will oftentimes negotiate an “adjusted” definition of EBITDA with their lender, it remains to be seen if Eligible Borrowers will be permitted to use a non-GAAP definition of EBITDA that includes negotiated add-backs when calculating the loan amount for a MSNLF or MSELF. Highly leveraged borrowers may be negatively impacted if they are required to calculate the loan amount based on “unadjusted” EBITDA.
  • Existing Indebtedness: The MSLP requires Eligible Borrowers refrain from repaying other debt of equal or lower priority, with the exception of mandatory principal payments, unless they have first repaid the Eligible Loan or upsized tranche, as applicable, in full. Eligible Borrowers should review existing credit agreements to determine the restrictions on incurrence of debt and prohibitions on negative pledges, and assess the need to obtain payment subordination agreements from existing creditors or take other steps to ensure compliance with this requirement.
  • SOFR: As noted above, MSNLF and MSELF loans are priced based on SOFR plus a margin. The Federal Reserve’s Alternative Reference Rate Committee has selected SOFR as the index that will replace U.S. dollar LIBOR when LIBOR is discontinued in 2021. Using SOFR as the index for pricing MSNLF and MSELF loans may present challenges for borrowers or lenders who have not previously used SOFR and, in the case of upsized tranches, may create administrative issues if the existing credit facility is priced using LIBOR as the index.
  • Application; Documentation: Standard forms of MSLP Loan Application and loan documents have not been issued by the Federal Reserve or U.S. Treasury Department.
  • Federal Reserve Rights: As the MSLP is currently structured, the SPV will own a majority (i.e., 95%) interest in loans originated under the MSNLF and upsized tranches originated under the MSELF. The MSLP does not address the Federal Reserve’s approval rights for the loans and tranches to be purchased by the SPV, nor does it specify what, if any, continuing consent or approval rights may be exercised by the Federal Reserve as owner of a majority interest in these loans and tranches. The level of participation and control that the Federal Reserve will ultimately exert remains with respect to these loans to be seen, but if such participation and control is significant, it may make it challenging for both lenders and borrowers to structure and administer these loans (including the ability to facilitate renewals, amendments, and waivers).

More to Come

The Board of Governors of the Federal Reserve System and Secretary of the Treasury has reserved the right to make adjustments to the terms and conditions summarized above.

The MSLP is still being finalized, and the Federal Reserve has solicited input from lenders, borrowers, and other stakeholders until April 16, 2020.

The facts, laws, and regulations regarding COVID-19 are developing rapidly and frequently changing. Since the date of publication, there may be new or additional information not referenced in this update. JW will continue to provide up-to-date insights and virtual events regarding COVID-19 concerns.  Our most recent insights, as well as information about recorded and upcoming virtual events, are available at the JW Coronavirus microsite.

This update is not intended to provide legal advice, and no legal or business decision should be based on its contents. Please consult with your legal counsel for guidance.

JW Contacts

For specific assistance or more information concerning these loan programs, please contact John Wittenberg or Lindsey Berwick.


Meet Lindsey

Lindsey B. Berwick has multifaceted experience handling commercial financing and transactional matters in both private practice and at one of the nation’s 60 largest financial institutions. Lindsey’s practice focuses on complex business transactions involving real estate, finance, commercial agreements and general corporate law. Clients look to Lindsey to evaluate and advise on commercial loan structures and documentation, leveraging her extensive background in the banking and finance industry to identify the correct financing vehicle for each transaction with a focus on achieving the clients’ business goals.

Meet John

John D. Wittenberg represents and counsels a wide variety of clients in all aspects of commercial real estate (office, retail, and industrial). John’s practice includes the representation of banks and other financial institutions, as well as equity sponsors and borrowers, on complex business transactions and a broad range of transactional matters. Over the course of his career, John has represented clients on acquisitions and dispositions of commercial real estate, commercial leases (office, retail and industrial), sale-leasebacks, and commercial development transactions.

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Please note: This article and any resources presented on the Jackson Walker Coronavirus microsite do not constitute legal or medical advice.