Federal Reserve Announces Two Main Street Lending Programs as Part of Stimulus Efforts

This morning, the Federal Reserve announced the Main Street New Loan Facility (MSNLF) and Main Street Expanded Loan Facility (MSELF) aimed at lending to US-based mid-size businesses with up to 10,000 employees or with less than US$2.5 billion in 2019 annual revenue. Under these programs, banks may make new loans (MSNLF) or increase the size of existing loans (MSELF). The Federal Reserve will purchase a 95% interest in these loans—up to a total of US$600 billion in loans through the two programs—with the intention of incentivizing US insured depository institutions to provide loans to mid-size businesses without undermining their ongoing capital requirements.

While the loans do not contain the same forgiveness provisions as the Paycheck Protection Program (PPP), principal and interest payments will be deferred for one year, and the programs provide another funding possibility for businesses that do not qualify for PPP loans but need liquidity.

Eligible borrowers will be required to comply with Section 4003(c)(3)(A)(ii) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which prohibits a company from issuing dividends or buying back stock during the term of a loan and the following 12 months, and requires a company to follow the executive compensation guidelines set forth in Section 4004 of the CARES Act. In addition to the CARES Act provisions, the term sheet requires an eligible borrower to commit to additional requirements, including that it will make reasonable efforts to maintain its payroll and retain employees during the term of the upsized tranche of the loan and that it will refrain from repaying other debt of equal or lower priority, with the exception of mandatory principal payments, until the loan is repaid in full.

Loans may take the form of new loans or upsizings of existing bank debt, but the proceeds cannot be used to refinance or pay off existing debt. Borrowers of these loans must commit: (1) to make reasonable efforts to maintain payroll and retain workers, (2) to not terminate or reduce any other available lines of credit, and (3) to not make payments on any other debt with equal or lower priority (except mandatory principal payments) before the loans under the MSNLF and MSELF programs are paid in full. The federal government’s 95% interest will rank pari passu to the remaining 5% interest of the originating bank (including with respect to any collateral originally securing loans upsized under the MSELF program).

Eligible Lenders	Eligible Borrowers	Eligible Loans	Maximum Size of Loans	Termination Date
US insured depository institutions US bank holding companies US savings and loan holding companies	Businesses with up to 10,000 employees or less than US$2.5 billion in 2019 annual revenues. Must be organized in the US or under the laws of the US with significant operations in and a majority of employees based in the US. Borrowers CANNOT simultaneously participate in the MSNLF and the MSELF or the Primary Market Corporate Credit Facility.	1. 4 year maturity 2. Amortization of principal and interest deferred for one year 3. Adjustable rate of SOFR + 250 to 400 basis points 4. Minimum loan size of US$1 million 5. Prepayment permitted without penalty 6. 100bps origination fee	MSNLF: Lesser of (i) US$25 million or (ii) an amount that, when added to the Borrower’s existing outstanding and committed but undrawn debt, does not exceed 4 times the Borrower’s 2019 EBITDA MSELF: Lesser of (i) US$150 million or (ii) 30% of the Borrower’s existingoutstanding and committed but undrawn bank debt does not exceed 6 times the Borrower’s 2019 EBITDA	The government will cease purchasing participations in Eligible Loans on September 30, 2020 unless the Board and the Treasury Department extend the Facility.

Given the total leverage ratio limit on size of 4.0x for new loans and 6.0x for upsizing of existing loans and the use of proceeds limitation against refinancing, as currently contemplated, these loans may be more useful for less leveraged businesses. Details, including the mechanics of an upsizing in the context of syndicated credit facilities held by a mixture of institutions including non-banks and how EBITDA will be defined, are not yet clear.

The Federal Reserve is seeking comments on the proposed terms through April 16, 2020. We will continue to monitor any additional developments, including changes to terms and modifications to eligibility.