As small businesses attempt to navigate the Paycheck Protection Program and other available federal relief, mid-sized businesses have awaited guidance on the Main Street Lending Program (the “Program”) and related corporate assistance programs targeted to mid-sized business enterprises, as initially proposed under the CARES Act (the “Act”). While we expect additional details to be released as these programs are implemented, the following is a high-level summary of financial assistance programs that are proposed to be available to mid-sized businesses.
MAIN STREET LENDING PROGRAM
The Federal Reserve and the Department of Treasury issued the following initial terms for both the Main Street New Loan Facility and the Main Street Expanded Loan Facility.
- Who can lend under the Program?
Any U.S. insured depository institution, bank holding company or savings and loan holding company are eligible to provide a loan.
- Who can borrower under the Program?
Any business organized or created in the United States that (i) has up to 10,000 employees or up to $2.5 billion in 2019 annual revenues, (ii) has significant operations in the United States, and (iii) has a majority of its employees based in the United States.
- What is the difference between the Main Street New Loan Facility and the Main Street Expanded Loan Facility?
The Main Street New Loan Facility is designed to make loans to eligible borrowers under a new credit facility. The Main Street Expanded Loan Facility is designed to expand or upsize an existing facility that was originated before April 8, 2020 by adding a new loan tranche.
A borrower cannot participate in both the Main Street New Loan Facility and the Main Street Expanded Loan Facility. Additionally, a borrower under either the Main Street New Loan Facility or the Main Street Expanded Loan Facility cannot also borrow under the Primary Market Corporate Credit Facility described below.
- How much can be borrowed?
The minimum loan amount under both the Main Street New Loan Facility and the Main Street Expanded Loan Facility is $1,000,000.
Under the Main Street New Loan Facility, the maximum loan amount is the lesser of (i) $25,000,000, and (ii) an amount when added to the borrower’s existing debt (both drawn and undrawn amounts), does not exceed four times 2019 EBITDA.
Under the Main Street Expanded Loan Facility, the maximum loan amount is the lesser of (i) $150,000,000, (ii) 30% of the borrower’s existing bank debt (both drawn and undrawn amounts), and (iii) an amount when added to the borrower’s existing debt (both drawn and undrawn amounts), does not exceed six times 2019 EBITDA.
- What are the general loan terms for a loan under the Program?
An eligible loan (or new loan tranche, as applicable) shall contain the following terms:
- The loan will have a four-year maturity date.
- A loan under the Main Street New Loan Facility will be unsecured.
- Amortization of principal and interest will be deferred for one year.
- The interest rate shall be the Secured Overnight Financing Rate plus 2.5% – 4%.
- There will be no prepayment penalty.
- What does a borrower have to certify to in order to obtain a loan under the Program?
In addition to what may be required under applicable law, a borrower must provide a certification as to the following:
- That the loan proceeds will not be used to repay or refinance outstanding loan balances.
- That the loan proceeds will not be used to repay other debt of equal or lower priority, other than mandatory principal payments.
- That the borrower will not seek to cancel or reduce any of its outstanding lines of credit.
- That the borrower requires financing due to the circumstances presented by COVID-19.
- That, through use of the loan proceeds, the borrower will make a reasonable effort to maintain its payroll and retain its employees during the term of the loan.
- That the borrower meets the EBITDA requirement set forth above.
- That the borrower will follow the compensation, stock repurchase and capital distribution restrictions set forth in the Act.
Under the Act, in order to participate in such corporate assistance programs, an applicant must agree not to pay dividends or repurchase equity interests, and to cap all employee compensation (including salary, stock, and bonuses) during the term of the loan and for the period ending one year after the obligations under the loan are repaid in full. Employees and executive officers receiving compensation in excess of $425,000 per year and $3 million per year in 2019, respectively, are prohibited from receiving certain salary increases and/or severance benefits for the period from March 1, 2020 through March 1, 2022.
- That the borrower is eligible to participate in the Program, including its ability to satisfy the conflicts-of-interest requirements of the Act.
- Are there any fees associated with obtaining a loan under the Program?
Under the Main Street New Loan Facility, the lender is required to pay a facility fee to the government equal to 1% of the amount of the loan that the government purchases (the government purchases 95% of the original principal amount of the loan and the issuing lender retains the other 5%). The lender can pass this facility fee onto the borrower. In addition, the borrower has to pay to the lender a 1% origination fee on the original principal amount of the loan.
Under the Main Street Expanded Loan Facility, the borrower pays a 1% fee to the lender on the amount of the upsizing.
- Does the Program have an end date?
Unless it is otherwise extended, the Program will terminate on September 30, 2020.
For additional details about the Main Street New Loan Facility and the Main Street Expanded Loan Facility, click here.
TERM ASSET-BACKED SECURITIES LOAN FACILITY PROGRAM
On April 9th, the Federal Reserve took action to expand the Term Asset-Backed Securities Loan Facility (the “TALF”) to help meet the credit needs of consumers and businesses through the use of a special purpose vehicle (“SPV”) funded by the Federal Reserve and the Department of Treasury. The new TALF will make loans of up to $100 billion initially, with the goal of providing liquidity to asset-backed securities (“ABS”) backed by newly issued consumer and small business loans, thereby increasing origination and borrower access to the underlying loans. The TALF was first established in 2008.
- Who is an eligible borrower?
All “U.S. companies” that own eligible collateral and maintain an account with a primary dealer (such as Banc of America Securities, Citigroup Global Markets, Credit Suisse, Deutsche Bank, Goldman Sachs, and J.P. Morgan Securities) are eligible to borrow under the TALF. Eligible borrowers (and issuers of eligible collateral) will be subject to the conflict of interest requirements of the Act.
- What kind of collateral is required?
TALF loans will be fully secured by eligible ABS, which now includes triple-A rated ABS collateral issued on or after March 23, 2020, as well as “legacy” commercial mortgage-backed securities and newly issued collateralized loan obligations, to the extent that all credit exposures thereunder (such as auto loans/leases, student loans, credit card receivables, or commercial mortgages) are issued or originated by a U.S. company or relate to real property located in the U.S. or its territories. Substitution of collateral during the term of the loan generally is not allowed. Collateral will be valued based on the haircut schedule provided in the detailed terms and conditions for the TALF facility.
- How much can be borrowed?
The Federal Reserve will lend an amount equal to the market value of the ABS securing the loan, less the “haircut” mentioned above.
- What are the fees charged and the interest rate?
The SPV will assess an administrative fee equal to 10 basis points of the loan amount. The interest rate will depend on the underlying types of ABS collateral and are specified in the terms and conditions for the TALF facility.
- What is the term of the loan and can it be prepaid without penalty?
Each loan provided under the TALF facility will have a maturity of three years. Loans made under the TALF may be pre-paid in part or in whole at the option of borrower.
- Are the TALF loans recourse or non-recourse to borrower?
Loans made under the TALF facility are made without recourse to the borrower, assuming the TALF requirements are met.
- How long will the TALF facility be in place?
Through September 30, 2020, unless extended by the Board of Governors of the Federal Reserve System and the Department of the Treasury.
For additional details about the TALF, click here.
ADDITIONAL CORPORATE ASSISTANCE
To supplement the programs described above, the Federal Reserve has introduced the following corporate assistance programs to provide additional liquidity for businesses and municipalities impacted by COVID-19. The following is a high-level summary of such programs as currently proposed.
Primary Market Corporate Credit Facility (“PMCCF”)
The PMCCF provides for the purchase of qualifying corporate bonds through an SPV capitalized by the Federal Reserve Bank of New York (“Bank”). Under the PMCCF, the SPV is authorized to purchase (i) qualifying bonds as the sole investor in a bond issuance and (ii) portions of syndicated loans or bonds upon issuance. In order to qualify, bonds must be issued by an eligible issuer and have a term of 4 years or less. An eligible issuer is a U.S. business with significant operations and a majority of employees based in the U.S., which (1) was rated at least BBB-/Baa3 as of March 22, 2020 by a major nationally recognized statistical rating organization, (2) is not an “insured depository institution” or “depository institution holding company”, (3) has not received support under the CARES Act or other federal programs, and (4) is able to satisfy the conflicts-of-interest requirements of the CARES Act (“Eligible Issuer”).
For additional details about the PMCCF, click here.
Secondary Market Corporate Credit Facility (“SMCCF”)
The SMCCF provides for the purchase of secondary market corporate debt, including corporate bonds and bond portfolios in the form of exchange-traded funds (“ETFs”), through an SPV capitalized by the Bank. In order to qualify, bonds must be issued by an Eligible Issuer, have a remaining maturity of 5 years or less, and must be sold to the Bank by an eligible seller. With respect to U.S.-listed ETFs, the SMCCF targets funds whose primary investment objective is to provide exposure to the U.S. corporate bond market, including investment grade and high-yield bonds.
For additional details about the SMCCF, click here.
Municipal Liquidity Facility (“MLF”)
The MLF aims to provide liquidity to state and local municipalities via the purchase of “Eligible Notes” by an approved SPV. Eligible Issuers under the MLF include U.S. states and the District of Columbia, U.S. cities with a population exceeding $1 million residents, and U.S. counties with a population exceeding $2 million residents. Eligible Notes include tax anticipation notes (TANs), tax and revenue anticipation notes (TRANs), bond anticipation notes and similar short-term notes with a maturation no later than 24 months from the date of issuance. Proceeds from the purchase may be used to (i) manage the cash flow impact of income tax deferrals resulting from extension of the filing deadline, (ii) offset potential reductions of tax and other revenues or increases in expenses as a result of COVID-19, and (iii) satisfy payment of indebtedness obligations of the relevant state, city or county.
For additional details about the MLF, click here.
We are continuing to monitor as additional guidance is released by the Federal Reserve and/or the Department of Treasury, and will provide new Alerts as appropriate. Our attorneys are available to answer any questions with respect to the foregoing.
 A business that is created or organized in the U.S. and that has significant operations in, and a majority of its employees based in, the U.S.
As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice. For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.