This post has been updated to reflect the recent changes to the Main Street Lending Program, as of May 27th, 2020.
For the past few weeks, we have been hosting a daily webinar on the CARES Act, sharing information on the resources that it makes available to businesses in order to help them survive the COVID-19 crisis. Attendees have reached out to us and shared their situations, as we have helped them make sense of the rules and submit their applications. Now there’s another program also making headlines: the Main Street Lending Program. So how does it stack up?
One thing that has become clear is that while the PPP can provide a lifeline to companies that have been hit, it is a short term solution to a problem that could very well be a long-term one. Once the funds run out, a business is essentially back to square one, hopefully with minimal additional debt on their balance sheet (provided they used most of the PPP funds on forgivable expenses), but with nothing to help them move forward.
After two rounds of financing for the PPP, it is undeniable that the new (post COVID-19) normal is going to be very different. That means companies will have to adapt to a future that is, as of right now, hazy at best. The Main Street Lending Program (MSLP) may provide a more structurally sound option to larger companies that want to make sure they can get to the other side of this crisis.
Most of the coverage of the MSLP has been as if it exists in a vacuum. Our view is that it should be looked at by business owners as complementary to the PPP & EIDL programs. Now, since the minimum loan amount is $500,000, it can be argued that the MSLP is not geared towards very small operations. We do not disagree with that.
Talk to your accountant and figure out your EBITDA. If you are at or above $85,000, you should look into the MSLP. There are three programs (New Loans, Priority Loans, and Expanded Loans) and which one you could potentially qualify for will depend on your debt situation.
You may – whether directly or indirectly – be involved in an industry where the value proposition comes from people congregating in a shared space. We have spoken to sporting/concert venues, dance schools, retail operations, catering businesses, funeral homes, restaurants and breweries. Owners of these types of companies need to plan for a good year before some sense of normalcy returns. By then, their industry, or their clients’ industry, might look very different. Without some sort of cushion, they will be unable to survive long enough to adapt.
Types of companies that need to look into the Main Street Lending Program
Assuming (as per the above quote) a minimum EBITDA of approximately $85,000:
- Companies that fall out of the PPP and/or EIDL definition of small business
- Companies that do qualify for the PPP and/or EIDL but are going to need more than two months’ worth of help before recovering
- Companies whose industries are undergoing disruption due to COVID-19 and need funds to position themselves to survive the what the new normal is going to be
Details of the Main Street Lending Program
There are two (3) components to the program, but we will mostly focus on the “Main Street New Loan Facility” and the “Priority Loan Facility”. The Federal Reserve Board took comments from lenders, borrowers, and other stakeholders on the program’s terms and conditions until April 16, 2020 and received over 2,200 letters from individuals, businesses, and nonprofits. As a result, they made 2 significant changes to the original version of the program:
- lowering the minimum loan size to $500,000 (from the initial $1,000,000).
- incorporating a refinancing provision in the Priority Loan facility
We are covering the program’s details as updated on May 27th and will continue updating this article as new guidance is issued.
What businesses are eligible for the Main Street Lending Program?
Eligible entities are businesses with up to 15,000 employees or revenues of less than $5 billion. The business must be created or organized in the U.S. or under the laws of the U.S. with significant operations in and a majority of its employees based in the U.S.
How much money can I get from the Main Street lending program?
New Loan Facility
- Minimum amount: $500,000
- Maximum amount is the lesser of:
- $25 million, or
- 4X 2019 EBITDA less outstanding and committed but undrawn debt. So if you have an EBITDA of $150,000 and an unused line of credit of $100,000, you would qualify for a maximum of $500,000: ($150,000 X 4) – $100,000 = $500,000
Priority Loan Facility
- Minimum amount: $500,000
- Maximum amount is the lesser of:
- $25 million, or
- 6X 2019 EBITDA less outstanding and committed but undrawn debt. So if you have an EBITDA of $90,000 and an unused line of credit of $25,000, you would qualify for a maximum of $515,000: ($90,000 X 6) – $25,000 = $515,000
What are the loan terms?
The (adjustable) interest rate is the Federal Reserve’s Secured Overnight Financing Rate (currently 0.01%) plus 3%.
Principal and interest payments will be deferred for one year and there is no prepayment penalty (unpaid interest will be capitalized). The maturity is four years. At the end of the grace period, the loan principal will be amortized as follows:
- New Loan Facility: 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.
- Priority Loan Facility: 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.
An eligible loan will be a secured or unsecured term loan that originated after April 24th, 2020, provided that the loan meets the additional requirements below.
What are the requirements?
The following financial covenants apply to loans made under the Main Street Program:
- The lender must attest that the proceeds of the eligible loan will not be used to repay or refinance pre-existing loans or lines of credit made by the lender to the borrower
- While the loan remains outstanding, the borrower may not repay any other debt of equal or lower priority, with the exception of mandatory principal payments.
- The participating lender may not cancel or reduce any existing lines of credit to the borrower, and the borrower may not seek to cancel or reduce any of its outstanding lines of credit with any lender (including the participating lender).
- The borrower must attest that it requires financing due to the pandemic and that it will make reasonable efforts to maintain its payroll and retain its employees during the term of the loan. No guidance was provided as to how this will be applied to businesses that have already furloughed or terminated employees.
- Any borrower whose securities are publicly traded must agree not to engage in stock buybacks for the duration of the loan plus one year (except to the extent required under a preexisting contractual obligation), and each applicant (i.e., whether or not public) must agree not to pay dividends on common stock for the duration of the loan plus one year. No guidance was provided as to whether exceptions to the dividend restriction will be implemented for tax distributions to owners of pass-through businesses such as S-corporations or LLC/partnerships.
- For the duration of the loan plus one year, the borrower must agree to the following:
- for any non-union employee or officer whose 2019 total compensation exceeded $425,000, total compensation for any 12-month period may not exceed 2019 total compensation levels;
- for any employee or officer whose 2019 total compensation exceeded $3.0 million, total compensation for any 12-month period may not exceed the sum of (i) $3.0 million plus (ii) 50 percent of the excess over $3.0 million;
- for any person in either of the above categories, severance upon termination may not exceed two times 2019 maximum total compensation.
Where/When/How do I apply?
Prospective borrowers will apply through participating banks, credit unions, and savings associations. Much like the PPP, your best is going to be the lender you are currently working with, assuming they are participating. It appears that participation from lenders is not going to be as widespread as it was for the PPP. Also, within the Fed’s framework, expect each bank to have slightly different application processes and documentation requirements. The program is expected to go live the week of June 8th, 2020.
Are there additional fees? What’s in it for the lenders?
Eligible lenders are U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies. These lenders will originate new loans. The government will purchase 95% of the loan while the financing institution will hold the other 5%.
You (the borrower) must pay an origination fee equal to 100 basis points (1%) of the principal amount of the loan. Participating lenders must also pay a facility fee equal to the amount of the origination fee, and lenders are authorized to charge this fee to applicants.
What documents do I need to gather so that I’m ready to go as soon as the program launches?
If you’re feeling particularly brave, head on over to the Federal Reserve Bank of Boston’s page: Main Street Lending Program Forms and Agreements.
There is an increasing amount of resources available to businesses to help them weather this crisis. We encourage you to explore local resources at the city, county, and state level. You should also look into private sector initiatives such as Facebook‘s and Google‘s Grant Programs, among others. A lot of these programs are still working out the kinks, so to speak. The best you can do is find what you’re eligible for, collect all your documentation, and apply away. There will be issues to fix and long wait times, so be kind to the people who are helping you navigate this.