Key updates to the various Main Street programs include:
- The formula for determining loan size under all facilities will utilize adjusted EBITDA.
- The minimum size of loans under the MSPLF was set at $500,000, while the loan minimum under the Main Street New Loan Facility (MSNLF) was reduced to $500,000, the loan minimum under the Main Street Expanded Loan Facility (MSELF) was increased to $10 million, and the maximum loan size under the MSELF was increased to up to $200 million.
- All facilities may be either secured or unsecured.
- Loans are now available to businesses with 15,000 or fewer employees or 2019 annual revenues of $5 billion or less.
- The Fed made clear that borrowers of PPP loans are no longer excluded from borrowing under the MSLP.
Notably, Eligible Borrowers will no longer have to self-certify as to exigent circumstances presented by COVID-19. However, borrowers must certify as of the date of the new loan and after giving effect to borrowing it that they have a reasonable basis to believe they have the ability to meet their financial obligations for at least the next 90 days and do not expect to file for bankruptcy during that time period. Moreover, Eligible Borrowers should make commercially reasonable efforts to maintain their payroll and retain their employees.
The combined size of the MSPLF, the MSNLF and the MSELF will be up to $600 billion. The Federal Reserve has published term sheets for each of the programs, which are available here.
The Fed has not yet issued final rules for this program and banks are not yet making loans under its terms. We expect banks to start accepting applications in the coming weeks and will continue to provide updates on the latest developments.
Click here to view the table.
Main Street Priority Loan Facility
Under the new MSPLF, the SPV will purchase 85% participations in Eligible Loans from Eligible Lenders. Eligible Lenders will retain 15% of each Eligible Loan until it matures or the SPV sells all of its participation (as compared to 5% for the other loan programs).
To qualify as an Eligible Borrower, a company must:
- Be an entity that is organized for profit as a partnership; a limited liability company; a corporation; an association; a trust; a cooperative; a joint venture with no more than 49 percent participation by foreign business entities; or a tribal business concern as defined in 15 U.S.C. §657a(b)(2)(C). U.S. Entities owned by a foreign parent are allowed to apply.
- Be established prior to March 13, 2020.
- Not be an Ineligible Business pursuant to 13 CFR 120.110(b)-(j) and (m)-(s)—these include nonprofits, financial businesses, life insurance companies, businesses located in a foreign country, businesses deriving more than one-third of gross annual revenue from legal gambling activities, businesses engaged in illegal activities, private clubs, government-owned entities, loan packagers, those in which the lender has an equity interest, those that have defaulted on a Federal loan or Federally assisted financing, those engaged in political or lobbying activities and those engaged in speculative businesses.
- Meet at least one of the following two conditions:
- has 15,000 or fewer employees or
- had 2019 annual revenues of $5 billion or less.
(Note that for counting employees, applicants should adhere to 13 CFR 121.106 and count all full-time, part-time, seasonal, or otherwise employed persons, excluding volunteers and independent contractors. Further, businesses should count their own employees and those employed by their affiliates, utilizing the SBA definition of affiliates found at 13 CFR 121.301(f).)
- Be 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.
- Not also participate in the MSNLF, the MSELF, or the Primary Market Corporate Credit Facility.
- Not have received specific support pursuant to the Coronavirus Economic Stabilization Act of 2020 (Subtitle A of Title IV of the CARES Act), although they may have participated in the Paycheck Protection Program.
Eligible Loans may be secured or unsecured, originated after April 24, 2020. Additionally, an Eligible Loan would have all the following features:
- Four-year maturity;
- principal and interest payments deferred for one year (unpaid interest will be capitalized);
- adjustable rate of LIBOR (one or three month) + 300 basis points;
- principal amortization of 15% at the end of the second year, 15% at the end of the third year, and a balloon payment of 70% at maturity at the end of the fourth year;
- minimum loan size of $500,000;
- maximum loan size that is the lesser of (i) $25 million or (ii) an amount that, when added to the Eligible Borrower’s existing outstanding and undrawn available debt, does not exceed six times the Eligible Borrower’s adjusted 2019 earnings before interest, taxes, depreciation, and amortization (EBITDA)1;
- at the time of origination and at all times the Eligible Loan is outstanding, the Eligible Loan is senior to or pari-passu with, in terms of priority and security, the Eligible Borrower’s other loans or debt instruments, other than mortgage debt; and
- prepayment permitted without penalty.
The Eligible Borrower must have been in sound financial condition prior to the onset of the COVID-19 pandemic. If the Eligible Borrower had other outstanding loans with the lender as of December 31, 2019, such loans must have had an internal risk rating equivalent to a “pass” in the Federal Financial Institutions Examination Council’s supervisory rating system.
Eligible Lenders are expected to conduct an assessment of each potential borrower’s financial condition at the time of the potential borrower’s application. Eligible Lenders also must, among other things, certify that they will not request Eligible Borrowers to repay debt extended by the Eligible Lender until the new loan is repaid in full (subject to certain exceptions), and they will not cancel or reduce existing lines of credit to the borrower absent an event of default.
Eligible Borrowers will have to certify that they will:
- Commit to refrain from repaying the principal balance of, or paying any interest on, any debt until the Eligible Loan is repaid in full, unless the debt or interest payment is mandatory and due. However, the Eligible Borrower may, at the time of origination of the Eligible Loan, refinance existing debt owed by the Eligible Borrower to a lender that is not the Eligible Lender.
- Commit not seek to cancel or reduce any of its committed lines of credit with the Eligible Lender or any other lender.
- Certify that they have a reasonable basis to believe that, as of the date of origination of the Eligible Loan and after giving effect to such loan, they have the ability to meet their financial obligations for at least the next 90 days and do not expect to file for bankruptcy during that time period.
- Attest that they 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, with an exception for tax distributions for pass-through entities. These include that the Borrower:
- Agrees for a period of 12 months from the date such loan is no longer outstanding, (i) not to buy back any equity securities of the borrower or any parent company that are listed on any national securities exchange (other than to the extent required under a contractual obligation in effect prior to the enactment of the CARES Act) and (ii) not to pay any dividend or make other capital distribution (except that an S corporation or other tax pass-through entities may make distributions to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings).
- Agrees to comply with certain limitations regarding employee compensation set forth by the CARES Act in Section 4004 (essentially, total compensation to officers or employees exceeding $425,000 in 2019 is frozen and total compensation to officers or employees exceeding $3 million is limited to the sum of (i) $3 million and (ii) 50% of the excess over $3 million received by the officer or employee in 2019).
- Certify that they are eligible to participate in the MSPLF, including in light of the conflicts of interest prohibition in Section 4019(b) of the CARES Act, which rules are designated to prohibit companies owned or controlled by certain senior government officials or members of their immediate family from participating in the MSLP. (Eligible Lenders must make this same certification about themselves.)
Eligible Borrowers should make commercially reasonable efforts to maintain their payroll and retain their employees during the time the Eligible Loan is outstanding.
The Eligible Lender may pass through to the borrower a 100-basis points transaction fee that will be charged to the lender by the SPV. In addition, the lender may charge the borrower a 100-basis points origination fee.
The MSPLF will cease purchasing participations in Eligible Loans on September 30, 2020, unless the program is extended by the Federal Reserve and the Treasury Department.
Changes Made to the Main Street New Loan Facility and Main Street Extended Loan Facility
The Federal Reserve also published revised term sheets for the MSNLF and the MSELF. Notable revisions include:
- Changes to Eligible Borrowers. This definition was expanded to conform to the MSPLF definition. It expands inclusion of businesses with 15,000 or fewer employees (previously 10,000 or fewer employees), or 2019 annual revenues of $5 billion or less (previously $2.5 billion or less). While Eligible Borrowers are permitted to have participated in the Paycheck Protection Program, they cannot have received specific support pursuant to the CARES Act.
- Changes to Eligible Loans.
a. MSNLF: Eligible Loans may now be secured or unsecured. In addition:
- principal and interest payments deferred for a year (unpaid interest will be capitalized)
- The rate would be an adjustable rate of LIBOR (one or three month) + 300 basis points.
- Principal amortization of one-third at the end of the second year, one-third at the end of the third year, and one-third at maturity at the end of the fourth year.
- The minimum size of the Eligible Loan was also reduced to $500,000 (from $1 million).
- Maximum loan size will be the lesser of (i) $25 million or (ii) an amount that, when added to the Eligible Borrower’s existing outstanding and undrawn available debt, does not exceed four times the Eligible Borrower’s adjusted 2019 EBITDA
- The Eligible Loan shall not be contractually subordinated in terms of priority to any other loans or debt instruments.
- The Eligible Borrower must have been in sound financial condition prior to the onset of the COVID-19 pandemic. If the Eligible Borrower had other outstanding loans with the lender as of December 31, 2019, such loans must have had an internal risk rating equivalent to a “pass” in the Federal Financial Institutions Examination Council’s supervisory rating system.
b. MSELF: Eligible Loans may now be secured or unsecured term loans or a revolving credit facility made by the Eligible Lender to the Eligible Borrower, with a remaining maturity of 18 months, provided that the upsized tranche must be a term loan. In addition, in regard to the upsize tranche:
- Principal and interest payments to be deferred for a year (unpaid interest will be capitalized).
- The rate would be an adjustable rate of LIBOR (one or three month) + 300 basis points.
- Principal amortization of 15% at the end of the second year, 15% at the end of the third year, and a balloon payment of 70% at maturity at the end of the fourth year.
- The minimum loan size was increased to $10 million (from $1 million).
- Maximum loan size will be the lesser of:
- $200 million (previously $150 million),
- 35% of the Eligible Borrower’s existing outstanding and undrawn available debt that is pari-passu in priority with the Eligible Loan and equivalent in secured status, or
- an amount that when added to the Eligible Borrower’s existing outstanding and undrawn available debt, does not exceed six times the adjusted 2019 EBITDA.
- At the time of upsizing and at all times the upsized tranche is outstanding, the upsized tranche is senior to or pari-passu with, in terms of priority and security, the Eligible Borrower’s other loans or debt instruments, other than mortgage debt.
- The Eligible Borrower must have been in sound financial condition prior to the onset of the COVID-19 pandemic. The Eligible Loan must have had an internal risk rating equivalent to a “pass” in the Federal Financial Institutions Examination Council’s supervisory rating system.
c. The formula for determining maximum loan size for both the MSNLF and the MSELF (i.e., the lesser of $25 million and a pro forma debt to EBITDA ratio of no more than four times in the case of the MSNLF or the lesser of $200 million and a pro forma debt to EBITDA ration of no more than six times in the case of the MSELF) now allows for the utilization of adjusted EBITDA on a similar basis as for the MSPLF, except that, in the case of the MSELF, EBITDA for the upsized tranche must be determined by the Eligible Lender using the same methodology as that used when the underlying Eligible Loan was originated or amended on or before April 24, 2020.
- Loan Participations. The SPV will purchase a 95% participation in the new loan or the upsized tranche, with the lender retaining the other 5%. The lender must hold it’s 5% until the new loan or the upsized tranche (as applicable) matures or the SPV sells its entire participation. In addition, in the case of the MSELF, the lender must also hold its interest in the underlying loan until the earliest of the maturity of the underlying loan, the maturity of the upsized tranche or the sale by the SPV of its entire participation.
- Eligible Lender to Conduct Assessment and Make Certifications. Eligible Lenders are expected to conduct an assessment of each potential borrower’s financial condition at the time of the potential borrower’s application and to make substantially the same certifications as for MSPLF loans.
- Changes to Borrower Certifications. Notably, the Eligible Borrower will not need to certify that it requires financing due to exigent circumstances presented by the COVID-19 pandemic. However, it must certify that it has a reasonable basis to believe that, as of the date of origination of the Eligible Loan and after giving effect to such loan, it has the 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.
As with the MSPLF, Eligible Borrowers should make commercially reasonable efforts to maintain their payroll and retain their employees during the time the Eligible Loan or the upsized tranche is outstanding, in the case of both the MSNLF and the MSELF.
The fee provisions applicable to the MSNLF are the same as those for the MSPLF. The fee provisions for the MSELF are similar, but with 75 basis points rather than 100 basis points for the transaction fee and a 75 basis point upsizing fee in lieu of an origination fee.
The Federal Reserve and the Treasury Department have reserved the right to make any adjustments to the terms and conditions in the term sheets.
We continue to monitor the situation and will provide updates as they become available.
For more information, please reach out to your regular Pillsbury contact or the authors of this client alert.
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1 Adjusted 2019 EBITDA must be calculated using the same methodology previously used by the lender for adjusting EBITDA when extending credit to the borrower or similarly situated borrowers on or before April 24, 2020. Note that the lender must certify to this effect.