The Main Street Lending Program is another tool to help businesses and nonprofit organizations weather the impacts of the COVID-19 outbreak. The Federal Reserve announced the Main Street Lending Program (MSLP) on April 9, 2020 to keep credit flowing to small and medium-sized U.S. businesses.
With lenders signed up to participate and after several modifications, the Main Street Lending Program is now open. The Main Street Lending Program, along with the individual Economic Impact Payments and the Paycheck Protection Program (PPP) from the CARES Act, are all financing options to support small and medium-sized businesses.
Main Street Lending Program Eligibility and Application Process
First, each borrower applies through a qualified lender to obtain the MSLP loan. Next, the lender sells 95% of the loan balance to the Federal Reserve after which your designated Main Street Lending Program lender will direct you to the correct “facility” (This will be discussed below).
While your lender will guide you through program requirements, it is important to come prepared for your discussion with the lender. The following program information will help sort out how the Main Street Lending Program works.
MSLP Borrower eligibility
For Main Street Lending Program loan eligibility, the borrower must be a qualified business. A qualified business is defined as one that;
- Meets one of these conditions:
- Has fewer than 15,000 employees or
- 2019 annual revenue of less than $5 billion
- Was established before March 13, 2020, under the laws of the United States, one of the states, the District of Columbia, a U.S. territory or possession, or an Indian Tribal government;
- Is a United States business created or organized in the United States or under the laws of the United States, with a majority of its employees based in the United States, and with significant operations in the United States. Note that being a U.S. subsidiary of a foreign company is permissible;
- Is not an ineligible business (the same rules apply here as under the PPP);
- Does not participate in the Primary Market Corporate Credit Facility;
- Participates in only one of the MSLP facilities; and
- Did not receive specific support under Title IV of the CARES Act as the recipient of an Economic Stabilization and Assistance benefits as a member of a distressed sector of the U.S. economy (such as the airline industry). This is support providing funding at the industry level does not include PPP or EIDL.
On July 17, 2020, the Federal Reserve updated the MSLP to include nonprofit organizations, including educational institutions, hospitals, and social service organizations. This article discusses the MSLP as it relates to businesses and does not elaborate on the special criteria for nonprofit organizations.
Borrower certifications and covenants
There are several certifications and covenants that the borrower must sign as part of the Main Street Lending Program application process. For instance, these certifications include:
- A requirement to make “commercially reasonable efforts” to retain employees during the term of the loan. The company must make good-faith efforts to maintain payroll and employee headcount. The determination of good-faith efforts takes into consideration the business’ specific economic environment, available resources, capacities, and need for labor. Just because a business already laid off employees does not disqualify a business from applying.
- A commitment to refrain from repaying interest and principal on other loans unless the debt or interest payment is mandatory and due.
- For MSPLF loans, the borrower can refinance existing debt owed to another lender at the time of the origination of the MSPLF loan.
- A commitment to maintain existing lines of credit with the MSLP lender or any other lender.
- A certification that the borrower has a reasonable basis to believe that it can meet its financial obligations. Borrowers must assert that as of the date of origination of loan and after giving effect to such loan, the borrower has the ability to meet its financial obligations for at least the next 90 days. The applicant must also certify that the business does not expect to file for bankruptcy during that time.
- A certification that the borrower is “unable to secure adequate credit accommodations from other banking institutions”. Further, the borrower would certify that the amount, price, or terms of credit available from other sources are not adequate to the borrower’s need during the current circumstances.
- A commitment extending to one year beyond the term of the loan to follow certain compensation, stock repurchase, and capital distribution restrictions. These commitments include:
- No pay raises, nor greater than double maximum compensation as severance for employees who earned over $425,000 in 2019.
- No single executive’s pay may exceed $3 million plus one-half of the 2019 excess amount over $3 million. Thus, if an executive was paid $5 million in 2019, the 2020 limit will be $4 million.
- A certification specifying that a controlling interest in the business is not owned directly or indirectly by the president, vice president, the head of an executive department, or a member of Congress. In addition, the applicant certifies that the business is not owned by a family member of any of these types of owners.
Facilities offered as part of the Main Street Lending Program
There are three “facilities” through which the Main Street Lending Program loans are made. They include;
- Main Street New Lending Facility (MSNLF)
- Main Street Priority Lending Facility (MSPLF), and
- Main Street Expanded Lending Facility (MSELF).
Your Main Street Lending Program lender will direct you to the correct facility. Keep reading for information on each facility.
A. Features common to all three MSLP loan facilities
There are some features common to all three MSLP loan facilities.
- The three MSLP facilities all stipulate the same rules regarding the definition of a qualified business. (See the section entitled “Borrower eligibility” for the definition of a qualified business.)
- All loans are for a 5-year term. Loan interest is set at an adjustable current LIBOR rate (1 or 3-month) plus 3%. Loan principal is due with 15% due in year 3, 15% due in year 4, and the balance of 70% due in year 5. Note that the current 1 and 3-month LIBOR rates are below 0.4%. LIBOR floors are not permitted under the MSLP. The upper limits for each facility discussed below includes existing outstanding and undrawn available debt of the borrower.
- Any existing loans of the borrower with the lender must have a “pass” rating under the Federal Financial Institutions Examination Council’s (FFIEC’s) rating system. This rating must be as of December 31, 2019. If the existing loan was purchased by the lender after December 31, 2019, the lender should use the risk rating at the time the lender purchased the loan to determine eligibility for upsizing under the MSELF.
- All three facilities have employee retention expectations as well as certifications and covenants. (See previous section entitled “Borrower certifications and covenants” for more information.)
- The MSLP application process uses certain calculations. If the borrower’s 2019 fiscal year is not based on the calendar year, then the borrower may use its 2019 fiscal year in its calculations. However, the lender does have the option of requiring the calculations to be based on calendar year data.
B. Unique features of the MSNLF
Upper Limit – The Main Street New Lending Facility has a minimum loan amount of $250,000. The maximum loan amount is determined as an amount equal to the lesser of $35 million (previously $25 million) or 4 times the borrower’s 2019 EBITDA*
Security and Subordination – The MSNLF loan may be secured or unsecured and may hold a junior lien position. However, it may not be junior in priority in bankruptcy to the borrower’s other unsecured loans or debt instruments.
C. Unique features of the MSPLF
Upper Limit – The Main Street Priority Lending Facility has a minimum loan amount of $250,000. The maximum loan amount under the MSPLF is an amount equal to the lesser of $50 million or 6 times the borrower’s 2019 EBITDA*.
Security and Subordination – At the time of origination, the MSPLF loan may be secured or unsecured but may not hold a junior position to any of the borrower’s other secured loans or debt instruments. – The MSPLF loan may not be contractually subordinated in terms of priority to any of the borrower’s other loans and debt instruments. – A secured MSPLF loan must meet a specified collateral coverage ratio.
Negative Pledge – The MSPLF loan documentation must include a covenant that prevents the borrower from pledging any assets if doing so would jeopardize the lender’s security.
D. Unique features of the MSELF
Upper Limit – The Main Street Expanded Lending Facility allows a borrower to upsize or increase existing term loan or revolving credit facility. The loan amount is a minimum of $10 million with the maximum loan amount equal to the lesser of $300 million or 6 times the borrower’s 2019 EBITDA*.
Security and Subordination – The MSELF loan must be secured by the collateral securing any other tranche of the underlying credit facility (with equal footing to any term loan tranche(s)). – It may only be unsecured if the borrower has no secured loans or other debt instruments as of the date of origination. – It may not be contractually subordinated in terms of priority to the borrower’s other loans or debt instruments.
Negative Pledge – Like MSPLF, the MSELF loan documentation must include a covenant that prevents the borrower from pledging any assets if doing so would jeopardize the lender’s security.
Main Street Lending Program Eligibility for business receiving PPP loans or EIDL loans
A borrower may still obtain a Main Street Lending Program loan even if they already received either a PPP loan or an EIDL from the SBA. Because the purpose of the Main Street Lending program is to support small and midsize businesses, even a business that obtained a PPP or EIDL loan may have access to these other loans.
Based on the interest rates offered, a business can take advantage of the low business rates under a variety of lending programs.
The borrower will pay loan origination or transaction fees
The borrower pays up to 1% of the principal amount to the lender at the time of loan origination for loans under the MSNLF and MSPLF. For the MSELF program, the loan origination fee is up to 0.75% of the principal amount. In addition, lenders may also charge the borrower for transaction fees that the lender owes to the Federal Reserve for these loans.
The lender can charge the origination and transaction fees in the principal amount of the MSLP loan. This is only allowed if the total loan amount, including fees, remains less than the maximum loan size allowed for the borrower under the applicable MSLP facility.
Federal Reserve 95% loan participation
After the lender makes the loan, the lender sells 95% of the loan to the Federal Reserve. Consequently, the lender is left with a 5% exposure. This attribute of the loan program discourages lenders from making bad loans. Note that the loan may be secured or unsecured. However, we expect that unsecured loans will be rare because of the lender’s exposure.
The Main Street Lending Program facilitates credit access for small to medium sized businesses. Most importantly, the Main Street Lending Program does not include forgiveness aspects as is the case with the PPP loans. In short, from the perspective of the borrower, these are very real loans.
Three types of MSLP loans are available. The major differences between the three relate to the overall limits and the impact on other indebtedness. As of now, there is $600 billion available for this program. The first step in obtaining an MSLP loan for your business is to contact a lender to submit a Main Street Lending Program Application. The program runs to September 30, 2020.
If you have questions on which MSLP loan is best for you, our team can guide on that decision. Contact us for a complimentary consultation.
*EBITDA stands for earnings before interest, taxed, depreciation, and amortization.
Meet the Author
Michael specializes in meeting the tax compliance, projection, and planning needs of businesses, entrepreneurs, and business owners. He is Tax Partner in PW Associates, a firm that provides CFO and outsourced tax and accounting services. Michael has regional and small CPA firm experience and ran a sole practitioner tax practice for over 25 years.
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