Apple Growth Partners

The Fed Continues to Go All in with Main Street Lending Program

By Chuck Mullen, Sue Peirce, and Matt Silla – AGP COVID-19 Response Team

Tuesday, April 14, 2020

But there’s a catch. A lot of them. This past Friday, the Federal Reserve published preliminary guidance on what amounts to a $75 billion equity investment to enable up to $600 billion in new financing support to small and mid-sized businesses in light of the COVID-19 crisis. This program is nothing like the Paycheck Protection Program (PPP) that we all have learned “way too much about” in the past couple of weeks. This one’s different – it has no “forgivable balance” features and brings with it more spending and operational “strings attached.” This program is in its infancy and is not ready for use just yet, but likely will be primed for bank application before the end April after the public comment period ends and Treasury and the Fed release additional guidance. The official guidance is recited below; however, our preliminary commentary suggests these loans are intended to help alleviate slow cashflow stress of profitable businesses as we try and make our way back to normalcy. What also remains to be seen is could these loans help aid in capital expansion and enterprise acquisitions? The initial guidance is barely specific enough to address that question; however, the guidance is clear that no matter what, the overarching employee retention theme continues. Indeed, the employee retention theme is loud and clear in this program as it has been in previous COVID packages. Apple Growth Partners will continue to monitor the Main Street Lending Program as further guidance and developments occur and be a resource to you as you add this “new twist” to your growing cash flow projection spreadsheet, and we will work with you and your lender to evaluate whether this package makes sense for your business.

From the Federal Reserve Board: The Main Street Lending Program (“MSLP”) will enhance support for small and mid-sized businesses that were in good financial standing before the crisis by offering 4-year loans to companies employing up to 10,000 workers or with revenues of less than $2.5 billion.  Principal and interest payments will be deferred for one year. Eligible banks may originate new Main Street loans or use Main Street loans to increase the size of existing loans to businesses.  Borrowers must also follow compensation, stock repurchase, and dividend restrictions that apply to direct loan programs under the CARES Act. Businesses that have taken advantage of the PPP may also take out Main Street loans. However, unlike the PPP loans made under the MSLP will not be forgiven. 

Eligible Lenders: Eligible Lenders are U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies.

Eligible Borrowers: Eligible Borrowers are businesses and nonprofits with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues. Each Eligible Borrower must be a business that is 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.

Loan Term Highlights:

  • 4-year maturity;
  • Amortization of principal and interest deferred for one year;
  • Adjustable rate of Secured Overnight Financing Rate (“SOFR”) + 250-400 basis points. 
  • Minimum loan size of $1 million;
  • Fees:  Origination 100 basis points, Annual Servicing Fee 25 basis points;
  • No prepayment penalty;
  • No collateral for new loans, existing loans are lender’s discretion.
  • Maximum loan size (refi of existing loans known as Main Street Expanded Loan Facility is the lesser of:
    • $150 million,
    • 30% of the Eligible Borrower’s existing outstanding and committed but undrawn bank debt,
    • 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 earnings before interest, taxes, depreciation, and amortization (“EBITDA”);
  • Maximum loan size (for new loans- known as Main Street New Loan Facility) is the lesser of:
    • $25 million,
    • 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 EBITDA.

Required Attestations: In addition to certifications required by applicable statutes and regulations, the following attestations will be required with respect to the upsized tranche of each Eligible Loan:

  • Borrower must attest that the proceeds of the upsized tranche of the Loan will not be used to repay or refinance pre-existing loans or lines of credit;
  • The Eligible Borrower must commit to refrain from using the proceeds of the upsized tranche of the Eligible Loan to repay other loan balances;
  • Lender cannot reduce or cancel exiting lines of credit and borrower cannot seek to cancel such lines of credit. 
  • The CARES Act states that the funds received must be used to retain at least 90% of the borrower’s workforce at full compensation and benefits until September 30, 2020. The guidance states only that the borrower will use the loan proceeds to make reasonable efforts to restore not less than 90% of its workforce as of February 1, 2020 and all compensation and benefits to its workers not later than four months after the public health emergency.
  • The Eligible Borrower will not outsource or offshore jobs until two years after the loan is repaid.
  • The Eligible Borrower must attest that it meets the maximum EBITDA leverage condition
  • The Eligible Borrower must attest that it will follow compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act as defined below: 
    • Cannot repurchase an equity security that is listed on a national securities exchange of the eligible business or any parent company of the eligible business while the direct loan is outstanding and for a period of one year after the loan is repaid, except to the extent required under a contractual obligation that is in effect as of the date of enactment of this Act;
    • Cannot pay dividends or make other capital distributions with respect to the common stock of the eligible business until one year after the loan is repaid [no guidance on pass-through entities];
    • During the period beginning on the date on which the agreement is executed and ending on the date that is 1 year after the date on which the loan or loan guarantee is no longer outstanding:
      • No officer or employee of the eligible business whose total compensation(defined as salary, bonuses, awards of stock, and other financial benefits provided to an officer or employee of the business.) exceeded $425,000 in calendar year 2019 (other than an employee whose compensation is determined through an existing collective bargaining agreement entered into prior to March 1, 2020)—
        • Will receive total compensation which exceeds, during any 12 consecutive months of such period, the total compensation received by the officer or employee from the eligible business in calendar year 2019; or
        • Will receive from the eligible business severance pay or other benefits upon termination of employment with the eligible business which exceeds twice the maximum total compensation received by the officer or employee from the eligible business in calendar year 2019; and
      • No officer or employee of the eligible business whose total compensation exceeded $3,000,000 in calendar year 2019 may receive during any 12 consecutive months of such period total compensation in excess of the sum of—
        • $3,000,000; and
        • 50 percent of the excess over $3,000,000 of the total compensation received by the officer or employee from the eligible business in calendar year 2019.

“The most terrifying words in the English language are: ‘I’m from the government and I’m here to help.’”- Ronald Reagan.  Shame on me, did I just say that out loud?  Actually, my personal opinion is, I applaud the Federal Reserve and Congress for acting so quickly to get badly needed aid to companies. Just be careful with this one – the Main Street Lending Program – make sure you can live up to the requirements. I say this because, in times of unprecedented volatility, it can be difficult to determine just what you can commit to and what you can’t. That’s why we’re here….to help you think through that decision. Let’s proceed with caution.

Apple Growth Partners’ published material provides general coverage of its subject area and is presented to the reader for educational purposes based on the most current regulatory information available at the time it was written.  All communications, whether written or oral should be reaffirmed prior to the submission of any application. All information in this published material and on our website is provided in good faith; however, we make no representation or warranty of any kind, express or implied, regarding the accuracy, adequacy, validity, reliability, availability, compliance with any law (federal, state or local) or professional standard or completeness of any information. We  assume no responsibility to any recipient of this material to correct or update its contents for any reason, including changes in any law or professional standard.  It is not intended to be audit, tax, accounting, advisory, consulting or investment advice.  The information in this article is also not a substitute for legal advice and may not be suitable in a particular situation. Consult your attorney for legal advice. 

Our articles, other published materials and website occasionally contain links to other web pages. Links to organizations and government agencies are provided as a convenience to our readers. The firm does not endorse and is not responsible for any third-party content that may be accessed from its website and does not recommend or endorse the use of any third-party’s services. The links are to be accessed at the user’s own risk, and the authors of this website make no representations or warranties about the content of these links.

Leave a Comment

Your email address will not be published. Required fields are marked *