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Federal Reserve Authorizes Main Street Loans for Companies Impacted by COVID-19

AAFCPAs would like to make clients aware that the Federal Reserve, effective April 9, 2020, authorized a series of programs to provide up to $2.3 trillion in loans to households, businesses, and state and local governments struggling to deal with the COVID-19 pandemic.

AAFCPAs has provided the below overview based on available information of the Main Street Lending Program, including the Main Street New Loan Facility (MSNLF) and Main Street Expanded Loan Facility (MSELF).

What We Advise

The Federal Reserve’s announcement and terms outlined below do not include the detailed procedures that will be required for full implementation of the Main Street Lending Program, and numerous details of the program are not yet resolved. We expect additional details regarding both a borrower’s application for credit under the program and the mechanics of a lender’s sale of loans to the MSNLF or the MSELF will be forthcoming after April 16, 2020, the close of the comment period stated in the Federal Reserve’s announcement.

What is clear is that clients seeking Main Street funding will need to apply through banks and other lenders authorized to process the loans. We advise clients to reach out to their bank and other lenders now to determine whether you will be able to apply for Main Street funding through these institutions. If your bank is not participating in the program, clients are advised to reach out to other lenders.

As with the PPP loans, AAFCPAs expects a similar rush of applications for the Main Street funds. We advise clients to assess their needs for the funding now, as we expect funds will be distributed on a first-come, first-served basis. We urge clients to gather information now for the application so once it is released you are ready to submit.

Main Street Lending Program

The Federal Reserve established the Main Street Lending Program to enhance support for small and mid-sized businesses that were in good financial standing before the crisis. Eligible banks may originate new Main Street loans or use Main Street loans to increase the size of existing loans to businesses.

Organizations seeking Main Street loans must commit to make reasonable efforts to maintain payroll and retain workers. Borrowers must also follow compensation, stock repurchase, and dividend restrictions that apply to direct loan programs under the CARES Act. Firms that have taken advantage of the PPP may also take out Main Street loans.

  Main Street New Loan Facility (MSNLF) Main Street Expanded Loan Facility (MSELF)
Eligible Borrowers Businesses with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues.

Created or organized in the US or under the laws of the US with significant operations in and a majority of its employees based in the US.

*The Fed’s Terms Sheet does not indicate that eligible borrowers need to employ a minimum number of employees. We anticipate there will be further guidance after the comment period.

Businesses with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues.

Created or organized in the US or under the laws of the US with significant operations in and a majority of its employees based in the US.

*The Fed’s Terms Sheet does not indicate that eligible borrowers need to employ a minimum number of employees. We anticipate there will be further guidance after the comment period.

Restrictions Eligible Borrowers that participate in the MSNLF may not also participate in the MSELF or the Primary Market Corporate Credit Facility. Eligible Borrowers that participate in the MSELF may not also participate in the MSNLF or the Primary Market Corporate Credit Facility.
Eligible Lenders U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies. U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies.
Eligible Loans An unsecured term loan made by an Eligible Lender(s) to an Eligible
Borrower that was originated on or after April 8, 2020, provided that the loan has the following features:

  1. 4 year maturity;
  2. Amortization of principal and interest deferred for one year;
  3. Adjustable rate of SOFR + 250-400 basis points;
  4. Minimum loan size of $1 million;
  5. 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 committed but undrawn debt, does not exceed four times the Eligible Borrower’s 2019 earnings before interest, taxes, depreciation, and amortization
    (EBITDA); and
  6. Prepayment permitted without penalty
A term loan made by an Eligible Lender(s) to an Eligible Borrower that was originated before April 8, 2020, provided that the upsized tranche of the loan has the following features:

  1. 4-year maturity;
  2. Amortization of principal and interest deferred for one year;
  3. Adjustable rate of SOFR + 250-400 basis points;
  4. Minimum loan size of $1 million;
  5. Maximum loan size that is the lesser of (i) $150 million, (ii) 30% of the Eligible Borrower’s existing outstanding and committed but undrawn bank debt, or (iii) an amount that, when added to the Eligible Borrower’s existing outstanding and committed but undrawn debt, does not exceed six times the Eligible Borrower’s 2019 earnings before interest, taxes, depreciation, and amortization (EBITDA); and
  6. Prepayment permitted without penalty.
Loan Participations The SPV will purchase a 95% participation in an Eligible Loan at par value, and the Eligible Lender will retain 5% of the Eligible Loan. The SPV and the Eligible Lender will share risk on a pari passu basis. The SPV will purchase a 95% participation in the upsized tranche of the Eligible Loan, provided that it is upsized on or after April 8, 2020, at par value. The SPV and the Eligible Lender will share risk in the upsized tranche on a pari passu basis. Any collateral securing an Eligible Loan, whether such collateral was pledged under the original terms of the Eligible Loan or at the time of upsizing, will secure the loan participation on a pro rata basis.
Required Attestations In addition to certifications required by applicable statutes and regulations, the following attestations will be required with respect to each Eligible Loan:

  • The Eligible 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 Eligible Lender to the Eligible Borrower.
  • The Eligible Borrower must commit to refrain from using the proceeds of the Eligible Loan to repay other loan balances. The Eligible Borrower must commit to refrain from repaying other debt of equal or lower priority, with the exception of mandatory principal payments, unless the Eligible Borrower has first repaid the Eligible Loan in full.
  • The Eligible Lender must attest that it will not cancel or reduce any existing lines of credit outstanding to the Eligible Borrower. The Eligible Borrower must attest that it will not seek to cancel or reduce any of its outstanding lines of credit with the Eligible Lender or any other lender.
  • The Eligible Borrower must attest that it requires financing due to the exigent circumstances presented by the coronavirus disease 2019 (COVID-19) pandemic, and that, using the proceeds of the Eligible Loan, it will make reasonable efforts to maintain its payroll and retain its employees during the term of the Eligible Loan.
  • The Eligible Borrower must attest that it meets the EBITDA leverage condition stated in section 5(ii) of the paragraph above specifying required features of Eligible Loans.
  • The Eligible Borrower must attest that it 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.
  • Eligible Lenders and Eligible Borrowers will each be required to certify that the entity is eligible to participate in the Facility, including in light of the conflicts of interest prohibition in section 4019(b) of the CARES Act.
In addition to certifications required by applicable statutes and regulations, the following attestations will be required with respect to the upsized tranche of each Eligible Loan:

  • The Eligible Lender must attest that the proceeds of the upsized tranche of the Eligible Loan will not be used to repay or refinance pre-existing loans or lines of credit made by the Eligible Lender to the Eligible Borrower, including the pre-existing portion of the Eligible Loan.
  • The Eligible Borrower must commit to refrain from using the proceeds of the upsized tranche of the Eligible Loan to repay other loan balances. The Eligible Borrower must commit to refrain from repaying other debt of equal or lower priority, with the exception of mandatory principal payments, unless the Eligible Borrower has first repaid the Eligible Loan in full.
  • The Eligible Lender must attest that it will not cancel or reduce any existing lines of credit outstanding to the Eligible Borrower. The Eligible Borrower must attest that it will not seek to cancel or reduce any of its outstanding lines of credit with the Eligible Lender or any other lender.
  • The Eligible Borrower must attest that it requires financing due to the exigent circumstances presented by the coronavirus disease 2019 (“COVID-19”) pandemic, and that, using the proceeds of the upsized tranche of the Eligible Loan, it will make reasonable efforts to maintain its payroll and retain its employees during the term of the upsized tranche of the Eligible Loan.
  • The Eligible Borrower must attest that it meets the EBITDA leverage condition stated in section 5(iii) of the paragraph above specifying required features of Eligible Loans.
  • The Eligible Borrower must attest that it 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.
  • Eligible Lenders and Eligible Borrowers will each be required to certify that the entity is eligible to participate in the Facility, including in light of the conflicts of interest prohibition in section 4019(b) of the CARES Act.
Facility Fee An Eligible Lender will pay the SPV a facility fee of 100 basis points of the principal amount of the loan participation purchased by the SPV. The Eligible Lender may require the Eligible Borrower to pay this fee.
Loan Origination/Upsizing and Servicing An Eligible Borrower will pay an Eligible Lender an origination fee of 100 basis points of the principal amount of the Eligible Loan. The SPV will pay an Eligible Lender 25 basis points of the principal amount of its participation in the Eligible Loan per annum for loan servicing. An Eligible Borrower will pay an Eligible Lender a fee of 100 basis points of the principal amount of the upsized tranche of the Eligible Loan at the time of upsizing. The SPV will pay an Eligible Lender 25 basis points of the principal amount of its participation in the upsized tranche of the Eligible Loan per annum for loan servicing.
Facility Termination The SPV will cease purchasing participations in Eligible Loans on September 30, 2020, unless the Board and the Treasury Department extend the Facility. The Reserve Bank will continue to fund the SPV after such date until the SPV’s underlying assets mature or are sold. The SPV will cease purchasing participations in Eligible Loans on September 30, 2020, unless the Board and the Treasury Department extend the Facility. The Reserve Bank will continue to fund the SPV after such date until the SPV’s underlying assets mature or are sold.

How May We Help?

AAFCPAs can assist in determining the loan options that best meet your needs. Please let us know if we may help.

If you have any questions, please contact your AAFCPAs Partner or Carla McCall, CPA, CGMA, at 774.512.4049 or cmccall@nullaafcpa.com.

About the Author

Carla McCall
Carla is Managing Partner of AAFCPAs, a 240 person CPA and consulting firm with offices in Boston, Westborough, and Wellesley, MA. She specializes in providing assurance, tax, and business consulting solutions for sophisticated nonprofit organizations, including: multi-service human & social services providers, behavioral health providers, arts & cultural organizations, foundations and grant making institutions.