Overview of Federal Reserve’s Main Street Lending Program

By: Kevan Lee Deckelmann, and Tara Walker

In Brief

On June 8, 2020, the Federal Reserve announced a significant expansion to the Main Street Lending Program (“MSLP”), which provides non-forgivable loans of between $250,000 to $300 million (depending on the loan facility) to businesses with 15,000 or fewer employees and/or 2019 annual revenues of $5 billion or less, through three loan facilities: the New Loan Facility (“MSNLF”), the Priority Loan Facility (“MSPLF”), and the Expanded Loan Facility (“MSELF”). The broad intent of the MSLP program is to help companies maintain operations and payroll during the COVID-19 pandemic.  The Federal Reserve has stated that it intends to purchase up to $600 billion in MSLP loans through September 30, 2020, when the program is scheduled to expire.

Although the Federal Reserve has not begun accepting MSLP loan applications, the program—which will be administered through the Federal Reserve Bank of Boston and participating individual lenders—is expected to launch imminently. As of June 15, 2020 registration for lenders is now open.

Businesses that have received Paycheck Protection Program (“PPP”) and/or Economic Injury Disaster Loans (“EIDL”) may still take part in the MSLP. Unlike the PPP, the MSLP sets relatively few restrictions on the use of the loan proceeds.  However, MSLP loans are not forgivable, and further, as with the $500 billion direct loan program established for large businesses and other recipients under the CARES Act, the MSLP establishes restrictions on executive compensation, stock buybacks, and issuing dividends, over the term of the loan plus one year, restrictions that do not apply to PPP loans. We have outlined the major contours to the MSLP, taking into account the most recent changes announced on June 8, 2020:

Eligibility (All Facilities)

• US-based company (not currently provided for non-profits) established prior to March 13, 2020
• “Unable to secure adequate credit accommodations” from other sources because the amount, price, or terms of credit from other available sources are “inadequate for the borrower’s needs during the current unusual and exigent circumstances”
• Together with its affiliates (using same SBA affiliation rules applied to PPP), MSLP borrowers must have either 15,000 or fewer employees or $5 billion or less in adjusted 2019 EBITDA
• May not be “ineligible business” under SBA rules modified by PPP
• Must not have participated in other similar credit facilities (receipt of PPP and/or EIDL loan does not affect eligibility for MSLP)
• “Conflict of interest” provisions apply – certain US government officials may not own 20% or more interest in borrower

Borrower Restrictions (All Facilities)

• 2019 executive compensation of between $425,000 and $3 million per year is frozen for loan term plus 12 months; executive compensation above $3 million must be reduced (by 50% of excess over $3 million) in some circumstances during same period
• Stock buybacks prohibited for loan term plus 12 months (unless borrower is contractually obligated to buy back stock)
• Dividends and other capital distributions are prohibited for loan term plus 12 months except S-corps and other pass-through entities may make distributions to cover tax obligations of owners

Loan Use Restrictions (All Facilities)

• Unlike PPP, there are no required categories of loan use (although borrowers “should make commercially reasonable efforts to retain employees” during the term of the loan)
• For borrowers with foreign affiliates, must direct all loan proceeds to itself and any US affiliates (i.e. not to foreign affiliates)
• Depending on loan facility, borrowers may not prepay existing debt while MSLP loan remains outstanding
• May not terminate other existing lines of credit during term of loan
• See also above “borrower restrictions”

Forgivability (All Facilities)

• None

Loan Terms (All Facilities)

• LIBOR plus 3.0% rate
• Five-year maturity
• Interest payments deferred one year
• Principal payments deferred two years

New Loan Facility Terms

• $250,000 min. loan; $35M max. loan
• Loan cannot exceed 4.0x adjusted EBITDA
• Loan may not be subordinated to other debt

Priority Loan Facility Terms

• $250,000 min. loan; $50M max. loan
• Loan cannot exceed 6.0x adjusted EBITDA
• Loan must be senior to or pari passu with other debt (except for mortgage debt)

Extended Loan Facility Terms

• “Upsize” to existing credit facility
• $10M min. loan; $300M max. loan
• Loan cannot exceed 6.0x adjusted EBITDA
• Upsized tranche must be senior to or pari passu with other debt (except for mortgage debt)

The terms and rules surrounding the MSLP are changing in real time. For more information on the Main Street Lending Program, visit the Boston Fed’s MSLP website here (https://www.bostonfed.org/supervision-and-regulation/supervision/special-facilities/main-street-lending-program.aspx). We will keep you informed with the latest updates on MSLP, and other relief programs including PPP, as more information becomes available.