Main Street Lending Program 2.0 Expands Loan Options for Small and Mid-Sized Businesses, but Practical Accessibility of Program to Borrowers Remains Unclear

On April 9, the U.S. Treasury Department (Treasury) and Federal Reserve released initial details regarding the establishment of the Main Street Business Lending Program (Main Street Program) to provide up to $600 billion in new financing for small and mid-sized businesses.

The initial guidance regarding the Main Street Program left potential borrowers and lenders with many unanswered questions.  After receiving over 2,000 comment letters from various individuals, organizations and businesses, on April 30, the Treasury and Federal Reserve released updated information clarifying various components of the Main Street Program and making three major substantive modifications:

• Introducing a third type of loan facility into the program that may be accessed by more highly leveraged borrowers and may be used to refinance certain existing debt obligations.
• Expanding the pool of eligible borrowers by increasing (1) the employee cap from 10,000 to 15,000 (calculated in accordance with SBA rules) and (2) the annual revenue cap from $2.5 billion to $5 billion, but clarifying that affiliates will be included in these calculations in accordance with SBA affiliation rules.
• Lowering the minimum new loan amount from $1 million to $500,000 and increasing the minimum and maximum amounts of upsized loans to $10 million and $200 million, respectively.

Notably, the updated guidance makes clear that the Main Street Program is intended for businesses that were in sound financial condition prior to the onset of the COVID-19 pandemic. Lenders are expected to apply their own underwriting standards to assess each potential borrower’s creditworthiness at the time of its application, and each lender will generally be required to hold its portion of the Main Street Program loan until it matures. The eligibility criteria should be viewed as the minimum requirements and each lender may apply other conditions, including additional collateral, as part of its approval process.

This alert includes a summary of the primary components of the Main Street Program, which updates our prior alert on this program to reflect the most recent information released by the Treasury and Federal Reserve.

Structure of the Main Street Program

The Main Street Program will consist of a single special purpose vehicle (SPV) that will administer three separate lending facilities: the Main Street New Loan Facility (New Loan Facility), the Main Street Priority Loan Facility (Priority Loan Facility), and the Main Street Expanded Loan Facility (Expanded Loan Facility). The Expanded Loan Facility provides for the upsizing of existing credit facilities (i.e., those originated prior to April 24) by up to $200 million. The New Loan Facility and the Priority Loan Facility each provides for new term loans of up to $25 million.

The SPV will be partially funded with a $75 billion equity investment by the Treasury pursuant to Title IV of the CARES Act, with up to $525 billion being funded by the Federal Reserve Bank of Boston. The SPV will purchase 95% participations in eligible loans under the New Loan Facility and Expanded Loan Facility and 85% participations in eligible loans under the Priority Loan Facility.  Eligible lenders under the Main Street Program are U.S. insured depository institutions, U.S. bank holding companies, U.S. savings and loan holding companies, U.S. intermediate holding companies of foreign banking organizations, and U.S. branches or agencies of foreign banks. At this time, nonbank lenders, such as private debt funds, are not eligible lenders under the program, thus excluding a broad group of potential sources of funding for the program. Under the most current guidance, the SPV intends to stop purchasing participation in eligible loans on September 30, 2020, unless the Main Street Program is extended.

Unlike loans available to qualifying small businesses under the Small Business Administration (SBA) Paycheck Protection Program (PPP), loans made under the Main Street Program are not forgivable, but for borrowers that qualify (likely including many companies that were precluded from obtaining PPP loans due to its more restrictive size standards), the Main Street Program could provide attractive terms and significant borrowing capacity.

A borrower will only be permitted to participate in one of the New Loan Facility, Priority Loan Facility, Expanded Loan Facility, and Primary Market Corporate Credit Facility (another facility established by the Treasury and Federal Reserve to purchase eligible corporate debt). However, a borrower may participate in both the Main Street Program and the PPP.

Overview of Main Street Program Loan Eligibility and Terms

Who is eligible to participate in the Main Street Program?

Any business established prior to March 13, 2020, with up to 15,000 employees or up to $5 billion in 2019 annual revenues is eligible, provided that such business meets all of the following criteria:

• Is created or organized in the United States or under the laws of the United States.
• Has significant operations in and a majority of its employees based in the United States.
• Has not received support pursuant to Section 4003(b)(1)-(3) of the CARES Act.
• Is deemed by the lender to have been in “sound financial condition” prior to the onset of COVID-19, with any existing loan made by such lender to the borrower having an internal risk rating of “pass” in the Federal Financial Institutions Examination Council’s supervisory rating system.

For purposes of determining Main Street Program eligibility, the number of employees and annual revenues of a business will include the employees and revenues of affiliates of the applicant business. Affiliation will be determined in accordance with the SBA’s affiliation rules as set forth in 13 CFR 121.301(f) (as amended by Section 1102(e) of the CARES Act), which provide that businesses are affiliates of each other “when one controls or has the power to control the other, or a third party or parties controls or has the power to control both.” Businesses may be found to be affiliates on the basis of common ownership; stock options, convertible securities or agreements to merge; common management; identity of interest among close relatives; or franchise or license agreements.

In addition, certain types of businesses that are excluded from obtaining PPP loans are also ineligible to participate in the Main Street Program. The categories of excluded businesses are set forth in 13 CFR 120.110(b)-(j), (m)-(s) (subject to modifications and clarifications set forth in SBA guidance issued in connection with the PPP) and include:

• Hedge funds, private equity firms and other businesses primarily in the business of lending or investments.
• Passive real estate developers or landlords.
• Businesses engaged in any illegal activity.
• Certain businesses that receive revenue from legal gaming.

Although nonprofit organizations are not currently eligible under the Main Street Program, the Federal Reserve has indicated that it “will be evaluating the feasibility of adjusting the borrower eligibility criteria and loan eligibility metrics” to allow for participation in the Main Street Program by nonprofit organizations.

What is an eligible loan under the New Loan Facility?

Eligible new loans under the New Loan Facility will have the following terms/characteristics:

• Originated on or after April 24, 2020.
• Maturity: four-year term loan.
• Payment:
  • Amortization of principal and interest deferred for one year.
  • Unpaid interest for the first year will be capitalized.
  • Principal amortization of 1/3 at the end of years two, three and four.
  • No prepayment penalty.
• Interest rate (adjustable): LIBOR (one or three month) + 300 bps.
• Collateral: may be secured or unsecured.
• Minimum loan amount: $500,000.
• Maximum loan amount: lesser of (1) $25 million or (2) the amount that would bring the borrower’s total outstanding debt (including any undrawn available debt) to an amount equal to four times its 2019 adjusted EBITDA.
• Shall not be contractually subordinated in terms of priority to any other loan of borrower (however may be subordinate pursuant to other loans by operation of law).

What is an eligible loan under the Priority Loan Facility?

Eligible new loans under the Priority Loan Facility will have the following terms/characteristics:

• Originated on or after April 24, 2020.
• Maturity: four-year term loan.
• Payment:
  • Amortization of principal and interest deferred for one year.
  • Unpaid interest for the first year will be capitalized.
  • Principal amortization of (1) 15% at the end of years two and three and (2) a balloon payment of 70% at maturity.
  • No prepayment penalty.
• Interest rate (adjustable): LIBOR (one or three month) + 300 bps.
• Collateral: may be secured or unsecured.
• Minimum loan amount: $500,000.
• Maximum loan amount: lesser of (1) $25 million or (2) the amount that would bring the borrower’s total outstanding debt (including any undrawn available debt) to an amount equal to six times its 2019 adjusted EBITDA.
• Shall be senior or pari-passu (in priority and security) to any other loan of borrower, other than mortgage loans.
• May be used to refinance existing debt owed to a lender that is not the lender providing the Main Street Program loan.

What is an eligible loan under the Expanded Loan Facility?

Eligible upsize loans under the Expanded Loan Facility will have the following terms/characteristics:

• Upsize to a term loan or revolving credit facility originated before April 24, 2020 that has a remaining maturity of at least 18 months.
• If the existing loan is part of a multi-lender facility, the lender providing the upsize loan must hold an interest in the existing facility, but other members of the original lender syndicate (e., that are not participating in the Main Street Program upsize) need not meet the eligible lender requirements of the Main Street Program.
• Maturity: four-year term loan.
• Payment:
  • Amortization of principal and interest deferred for one year.
  • Unpaid interest for the first year may be capitalized.
  • Principal amortization of (1) 15% at the end of years two and three and (2) a balloon payment of 70% at maturity.
  • No prepayment penalty.
• Interest rate (adjustable): LIBOR (one or three month) + 300 bps.
• Collateral: may be secured or unsecured (must be secured if underlying loan is secured).
• Minimum loan amount: $10 million.
• Maximum loan amount: lesser of (1) $200 million, (2) 35% of the borrower’s existing outstanding debt (including any undrawn available debt) that is pari-passu with the underlying loan, or (3) the amount that would bring the borrower’s total outstanding debt (including any undrawn available debt) to an amount equal to six times its 2019 adjusted EBITDA.
• Shall be senior or pari-passu (in priority and security) to any other loan of borrower, other than mortgage loans.

What restrictions will be imposed on a borrower under the Main Street Program?

The borrower will be required to provide certain certifications and covenants, including but not limited to the following:

• It will refrain from repaying other debt (except mandatory principal and interest payments) until the Main Street Program loan has been repaid in full, provided that, subject to certain limitations, the borrower may pay the following ordinary course debt obligations: (1) repayment of a revolving line of credit in accordance with the borrower’s normal course of usage for such line of credit, (2) payment of standard inventory and equipment financing, and (3) refinancing maturing debt.
• It will not seek to cancel or reduce any of its committed lines of credit before their scheduled expiration.
• As of the date of origination of the Main Street Program loan, and after giving effect to such loan, it has a reasonable basis if the borrower’s ability to meet its financial obligations for at least the next 90 days and does not expect to file for bankruptcy during that time period.
• It will make good faith efforts to maintain its payroll and retain its employees during the term, in light of its capacities, the economic environment and its available resources.
• It meets the applicable EBITDA leverage condition referenced in the formula for calculating the maximum loan amount.

As further detailed in our prior alert, borrowers must agree to certain restrictions on stock buybacks, executive bonuses, dividends and capital distributions (except that any tax pass-through entity may make distributions to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings).

What fees are associated with loans under the Main Street Program?

• If required by the lender, the borrower will pay the lender an origination fee of up to 100 bps of the principal amount (75 bps for the Expanded Loan Facility).
• The SPV will pay the lender a servicing fee of 25 bps of the principal amount of its participation per annum.
• The lender will pay the SPV a transaction fee of 100 bps of the principal amount (75 bps for the Expanded Loan Facility), which fee may be passed through to the borrower.

Takeaways for Borrowers and Lenders

While the recently updated guidance clarifies many questions raised by the initial Main Street Program information, there continue to be significant impediments to some companies’ ability to access these funds. While the eligibility requirements have been expanded in certain respects, given the applicability of the SBA affiliation rules many private equity portfolio companies (particularly those in larger funds) may not be eligible to participate. And while the leverage tests have been revised to reference “adjusted” 2019 EBITDA (versus simply EBITDA), thus widening eligibility to a number of otherwise excluded companies, the mere reliance upon EBITDA as the primary underwriting metric for the program may exclude broad groups of potential borrowers, particularly asset-based companies and growth companies.

Additionally, many questions remain as to the practical ability of borrowers to access the Main Street Program. For borrowers with existing indebtedness, given the current economic environment, their current lenders may have little incentive to consent to the borrower’s incurrence of additional indebtedness, particularly when it could lead to a dilution of their interest in shared collateral. Similarly, for borrowers seeking loans from new lenders under the New Loan Facility or Priority Loan Facility, the willingness of lenders to underwrite new lending clients in the current environment, even though they will retain only a small minority participation in the loan, is untested and may vary significantly depending on the borrower’s industry and business fundamentals.

We would also refer you to our prior alert on this topic, which contains a discussion of various considerations that a borrower should undertake when exploring the Main Street Program. If you have questions about the Main Street Program and what it means for your business, please contact the authors.