Client Alert
June 30, 2020

Federal Reserve Main Street Lending Facilities: An Alternative for Small and Medium Sized Businesses
This alert updates our April 15, 2020 client alert on the Main Street Lending Program. The three lending programs described below are in lieu of the Main Street Expanded Loan Facility and Main Street New Loan Facility described in our April 15, 2020 client alert.

On June 8, 2020, the Federal Reserve released term sheets for three Main Street Lending Programs with a combined size of up to $600 billion to assist small and medium sized businesses impacted by the COVID-19 pandemic. The revised Main Street Lending Programs, amongst other things, increased the number of businesses considered to be Eligible Borrowers, increased the term of the loan under each facility from four years to five years, changed the maximum and minimum loan sizes and increased the principal payment deferment periods.

The Main Street Expanded Loan Facility (MSELF) applies to upsized tranches of existing loans originated on or before April 24, 2020 which have a remaining maturity of at least 18 months (including adjustments made after April 24, 2020 including the upsizing). The Main Street New Loan Facility (MSNLF) and the Main Street Priority Loan Facility (MSPLF) applies to eligible loans originated after April 24, 2020. While these loan facilities are separate from the disaster loans available through the United States Small Business Administration and the Payroll Protection Program (PPP) established under the CARES Act, businesses that have taken advantage of the EIDL and PPP loans may also take advantage of one of the Main Street Lending Programs if they meet the criteria. However, a borrower and its affiliates may only participate in one of the following: (i) MSELF, (ii) MSNLF, (iii) MSPLF or (iv) the Federal Reserve’s Primary Market Corporate Credit Facility.  

The Federal Reserve is working out final operational details of MSELF, MSNLF and MSPLF and to that end, has been frequently updating their FAQ section regarding the Main Street Lending Program which can be found on the Main Street Lending Website at federalreserve.gov/monetarypolicy/mainstreetlending.htm. The Federal Reserve Bank of Boston will commit to lend to a single SPV on a recourse basis. The Department of Treasury will make a $75 billion investment in such SPV in connection with the Main Street Lending Programs. The SPV will purchase a 95% participation in each Loan, and the originating lender will retain 5% of each Loan. Such participations will be purchased until September 30, 2020, unless the Main Street Lending Programs are extended. The Federal Reserve Bank of Boston will continue to fund the SPV until the underlying assets mature or are sold. MSELF, MSNLF and MSPLF are substantially similar to each other and are summarized below.

Lenders:  Loans under the three Main Street Lending Programs are obtained from eligible private lenders, which include U.S. federally insured depository institutions, a U.S. branch or agency of a foreign bank, U.S. bank holding companies, U.S. savings and loan holding companies, a U.S. intermediate holding company of a foreign banking organization or a U.S. subsidiary of any of the foregoing.

Eligible Borrowers:  Eligible borrowers must have been organized prior to March 13, 2020, and are businesses with 15,000 employees or less or with up to $5 billion in annual revenues for 2019. Such businesses must be organized under the laws of the United States with significant operations in and a majority of its employees based in the U.S. It is currently unclear whether an eligible borrower is required to have employees to be eligible for the Main Street Lending Programs. Companies that are considering borrowing money under the Main Street Lending Programs should also scrutinize their other agreements, including loan documents, to ensure that borrowing under one of the Main Street Lending Programs does not require any consents from a lender or cause any defaults under any loan documents. 

Loan Features:
  • Five year maturity;
  • Principal payments deferred for two years and interest payments deferred for one year (unpaid interest will be capitalized);
  • Adjustable rate of interest = LIBOR (1 or 3 month) + 300 basis points;
  • Principal amortization of 15% at the end of the third year, 15% at the end of the fourth year, and a balloon payment of 70% at maturity at the end of the fifth year;
  • Prepayments permitted without penalty;
  • Loans are not forgivable;
  • Loan size:
Other Requirements:
  • MSELF/MSPLF: at the time of upsizing/origination and at all times the upsized tranche/loan is outstanding, upsized tranche/loan must be senior to or pari passu with borrower’s other loans and debt instruments other than mortgage debt.
  • MNSLF: must not be contractually subordinate in priority to any of borrower’s other loans or debt instruments.
  • If borrower had other loans with lender as of December 31, 2019, such loans must have IRR equivalent to “pass” on December 31, 2019.
Fees:
  • Transaction Fee for MSNLF and MSPLF: Lenders will pay the SPV a transaction fee of 100 basis points of the principal amount of the loan participation purchased by the SPV. This fee can be passed on to a borrower.
  • Transaction Fee for MSELF: Lenders will pay the SPV a transaction fee of 75 basis points of the principal amount of the upsized tranche at the time of the upsizing. This fee can be passed on to a borrower.
  • Origination and Servicing Fees for MSNLF and MSPLF: Borrowers will pay the Lender an origination fee of up to 100 basis points of the principal amount of the Loan at the time of origination. SPV will pay Lender 25 basis points of the principal amount of its participation in the Loan per annum for loan servicing.
  • Origination and Servicing Fees for MSNLF and MSPLF: Borrowers will pay the Lender an origination fee of up to 100 basis points of the principal amount of the Loan (or the upsized tranche in the case of MSELF loans). SPV will pay Lender 25 basis points of the principal amount of its participation in the Loan (or upsized tranche in the case of MSELF loans) per annum for loan servicing.

Borrower’s Required Attestations:  To obtain MSELF or MSNLF, a borrower must attest to the following, among other things:
  • Such borrower certifies that at the date of origination of the loan/upsizing and for 90 days after such origination, and after giving effect to the loan, will have the ability to meet its financial obligations for 90 days and not file for bankruptcy during that time period; requires financing due to exigent circumstances caused by the COVID-19 pandemic. Using the proceeds of the upsized tranche or the loan, as the case may be, the borrower will make reasonable efforts to maintain its payroll and retain its employees during the term of the upsized tranche or the loan;
  • Such borrower is eligible to participate in the loan facility, including a certification that it is not a business more than 20% directly or indirectly owned by certain governmental officials (including the President, Vice President, senior executive branch officials or members of Congress) or certain of their immediate family members;
  • Such borrower will follow compensation, stock repurchase and capital distribution restrictions under Section 4003(c)(3)(A)(ii) of the CARES Act, which includes certain limitations regarding employee and officer compensation, and for the term of the loan and during one year after the loan is no longer outstanding, the borrower agrees to (a) not purchase any listed equity security of itself or any parent company (unless it had a pre-existing contractual obligation to do so prior to the loan) or (b) not pay dividends or other capital distributions with respect to common stock. Borrowers that are S-corps or other tax pass-through entities may make distributions to the extent reasonably required to cover its owners’ tax obligations with respect of the entity’s earnings;
  • Such borrower may not repay the principal balance or interest on any debt unless the debt or interest payment is mandatory and due. The MSPLF permits the borrower at the time of the origination of the MSPLF loan, to refinance existing debt owed by such borrower to a lender other than the lender making the MSPLF loan; and
  • Such borrower must not cancel or reduce any of its outstanding lines of credit.


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If you have any questions or would like additional information, please contact Melanie Chieu ( mchieu@egsllp.com , 646-895-7171) or the primary EGS attorney with whom you work.

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This memorandum is published solely for the informational interest of friends and clients of Ellenoff Grossman & Schole LLP and should in no way be relied upon or construed as legal advice.