On April 9th, the Federal Reserve introduced the Main Street Lending Program (MSLP), a new lending initiative that supports not only small businesses, but mid-sized businesses as well. This program was established to assist businesses that were financially sound before the onset of the COVID-19 pandemic with maintaining operations and payroll. The U.S. Treasury is backing the program with $75 billion in funding received through the CARES Act.
Effective April 30, 2020, new lending support is available for the program through the addition of a third loan option, allowing for the full program to provide up to $600 billion. The minimum loan size for certain loans has also been lowered, and borrower eligibility has been expanded. The program infrastructure is still in the works. If you are interested in this program, contact your preferred bank to inquire if they are an eligible lender. The Federal Reserve will update their site for new information, as the program becomes operational.
While the MSLP offers the opportunity for a single loan for eligible businesses, the program now operates through three facilities: the Main Street New Loan Facility (MSNLF), the Main Street Priority Loan Facility (MSPLF), and the Main Street Expanded Loan Facility (MSELF). The MSNLF and MSPLF are facilities in place for origination of new loans, whereas the MSELF is available for “upsizing” existing loans.
The Federal Reserve Bank of Boston will purchase 85% of each MSPLF loan, leaving 15% with the lender for risk retention, 95% of each MSNLF loan, with 5% left with the lender, and 95% of the upsized portion of each MSELF loan, with 5% left with the lender. Federal Reserve purchases will occur through September 30, 2020.
Loans through this program can be restrictive, so understanding the standard requirements, commitments, and terms is paramount. Also of note, your name, loan type, loan amount, interest rate, and types and amounts of collateral pledged will be made public should you borrow through the MSLP.
Loan Standards Across MSLP Facilities
Borrower eligibility – Your business must have been created or organized in the U.S., or under U.S. laws, with most of your operations and employees within the U.S. Additionally, your business must have been operational prior to March 13, 2020. Originally, the program set eligibility standards at 10,000 or less employees or $2.5 billion or less in annual revenue for 2019. The recent expansion of the program, however, allows businesses with 15,000 or less employees or annual revenue of $5 billion or less to be eligible for a loan. To determine eligibility based on employee size or revenue, companies must aggregate the employees/revenue from affiliated entities.
Businesses may be eligible for the MSLP if they have already taken out a Paycheck Protection Program (PPP) loan; however, no loans will be issued to businesses with other funding under the CARES Act, such as funding for airlines, cargo carriers, and national security loans.
Certain loan terms – Loans from all facilities are not eligible for forgiveness, will have a four-year maturity, and principal and interest payments will both be deferred for a period of one year, with unpaid interest capitalized. Each loan has an adjustable rate of LIBOR (1 or 3 month) + 300 basis points, and may be prepaid without penalty.
Commitments – Borrowers must make reasonable effort to maintain payroll and employees while the loan is outstanding, and they must make certain commitments before receiving a loan through any MSLP facility. These include refraining from repayment on principal balances and interest on certain other debt until the MSLP loan is repaid in full, and not seeking to cancel or reduce committed lines of credit through your MSLP lender or other lenders. You must certify that, to the best of your knowledge, your business can meet financial obligations for at least 90 days and does not expect to file for bankruptcy, and commit to following certain direct loan program restrictions set forth in the CARES Act legislation. A restriction on dividends during the loan term and 12 months after the loan is repaid. However, in contrast with the original CARES Act legislation, the MSLP allows eligible S corporation or pass-through entities to make tax distributions to cover tax on the business’s earnings.
Term Differences Across MSLP Facilities
Principal amortization – For MSNLF loans, principal amortization of 33.33% at the end of the second year, 33.33% at the end of the third year, and 33.33% at maturity, which is the end of the fourth year.
For both MSPLF and MSELF loans, principal amortization of 15% at the end of the second year, 15% at the end of the third year, and a balloon payment of 70% at maturity, which is the end of the fourth year.
Minimum loan size – For MSNLF loans, the minimum loan size is $500,000, as opposed to the originally stated $1 million. For MSPLF loans, the minimum loan size is also $500,000. The minimum loan size for the MSELF is $10 million.
Maximum loan size – For MSNLF loans, the maximum amount is the lesser of $25 million or an amount that, when added to your existing outstanding and undrawn available debt, does not exceed FOUR times your adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for 2019.
For MSPLF loans, the maximum amount is the lesser of $25 million or an amount that, when added to your existing outstanding and undrawn available debt, does not exceed SIX times your adjusted EBITDA for 2019.
And for MSELF loans, the maximum is the lesser of $200 million, 35% of your existing outstanding and undrawn available debt that is equal in priority with the loan and equivalent in secured status, or an amount that, when added to your existing outstanding and undrawn available debt, does not exceed SIX times your adjusted EBITDA for 2019.
Loan Fees – For MSNLF and MSPLF loans, the borrower must pay the lender an origination fee when the loan is originated of up to 100 basis points of the principal amount of the upsized portion of the loan. Lenders for these facilities may also require borrowers to pay an additional transaction fee of 100 basis points of the principal of the loan at origination.
For MSELF loans, the borrower must pay an origination fee when the loan is upsized of up to 75 basis points of the principal amount of the upsized portion of the loan. Lenders for this facility may also require borrowers to pay an additional transaction fee of 75 basis points of the principal of the loan at the time it is upsized.
ARB is dedicated to updating our clients and community as the legislative implications of the COVID-19 pandemic continue to unfold. Contact us if you have questions on the MSLP, or visit our COVID-19 Financial Resource and Tax Center for additional information on related matters.
by Holly Ferguson, CPA