Main Street Lending Program Expands Eligibility and Terms

Today, the Federal Reserve announced that it is expanding the scope and eligibility for its Main Street Lending Program, in an effort to make loans available for more businesses. It is also establishing a new loan option aimed at higher-leveraged borrowers.

As we described in our prior client alert, the Main Street Lending Program is designed to incentivize US insured depository institutions to provide loans to small and mid-size businesses without undermining their ongoing capital requirements. In response to public comments on the initial terms of the program, the Federal Reserve has now made three changes from the initial proposal:

1. It expands the pool of businesses eligible to borrow;
2. It lowers the minimum loan size for certain loans to US$500,000; and
3. It creates a third-loan option, with increased risk-sharing by lenders for borrowers with greater leverage.

The Federal Reserve Bank of Boston will manage these facilities and is continuing to work internally to develop the forms, policies, and processes for purchasing loans from Eligible Lenders.

Changes Announced Today

Program Opens to Larger Businesses

Initially, the Main Street Lending Program was limited to participation by businesses with up to 10,000 employees or US$2.5 billion in annual revenues. The Federal Reserve has now loosened the eligibility requirements for businesses wishing to take part in the program to allow those with up to 15,000 employees to participate. Revenue limitations increased to US$5 billion, and a business can qualify by meeting either the size or revenue standard, or both.

The SBA’s affiliation rules apply in determining a business’s eligibility based size. For this size determination, employees and 2019 revenues are calculated by aggregating the employees and 2019 revenues of the business itself with those of the business’s affiliated entities in accordance with the affiliation test set forth in 13 CFR 121.301(f).

See O’Melveny’s March 29, 2020 Client Alert for a summary of the SBA’s affiliation rules and how they may apply to venture-backed companies.

Minimum Loan Size Reduced

After reportedly receiving substantial feedback that the initial US$1 million loan size was creating a barrier to businesses with substantial need, the Federal Reserve’s program revision lowers the minimum loan size for the existing Main Street New Loan Facility (MSNLF) from US$1 million to US$500,000.

New Main Street Priority Loan Facility

The Federal Reserve has established a new loan option called the Main Street Priority Loan Facility (MSPLF). Under the MSPLF, lenders will retain a 15% share on loans that, when added to existing debt, do not exceed six times a borrower's income, adjusted for interest payments, taxes, and depreciation and other adjustments. Under the existing loan options, lenders retain only a 5% share of the loans. Unlike the MSNLF and MSELF loans, borrowers under the MSPLF Program may, at the time of origination of the MSPLF Loan, refinance existing debt. Borrowers who participate in the MSPLF cannot also participate in either the Federal Reserve’s other Main Street lending programs or the Primary Market Corporate Credit Facility.

Adjustment of Interest Rates

The Federal Reserve also changed the potential interest rates from SOFR + 250-400 basis points to either the LIBOR 1-month or 3-month rate +300 basis points.

Calculation of EBITDA

The announcement also clarified that 2019 EBITDA will be calculated by using a methodology the lender previously used for adjusting EBITDA when extending credit to the borrower or to similarly situated borrowers. For MSELF Loans, the methodology used by the lender must be the methodology it previously used for adjusting EBITDA when originating or amending the underlying loan.

Overview of Main Street Lending Programs

Although a start date for the Main Street Lending programs has not yet been announced, the Federal Reserve is still committed to purchasing up to US$600 billion of participation in eligible loans with the Treasury contributing US$75 billion from the CARES Act. The chart below compares the features of the various loan options, with newly announced options and features in bold.

For all programs, eligible borrowers will still be required to comply with Section 4003(c)(3)(A)(ii) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which prohibits a company from issuing dividends or buying back stock during the term of a loan and the following 12 months, and requires a company to follow the executive compensation guidelines set forth in Section 4004 of the CARES Act. In addition to the CARES Act provisions, the term sheets require an eligible borrower to commit to additional requirements, including that it will make reasonable efforts to maintain its payroll and retain employees during the term of the MSNLF or MSPLF loan, or MSELF upsized tranche and that it will refrain from repaying other debt of equal or lower priority, with the exception of mandatory principal payments, until the loan is repaid in full.

The Federal Reserve is also evaluating a separate program for nonprofit organizations. We will continue to monitor any additional developments, including changes to terms and modifications to eligibility.