Federal Reserve’s Main Street Lending Program is a Critical Company Financing Option

With the exhaustion of the prime SBA program to support small businesses harmed by COVID 19, the Federal Reserve Bank’s Main Street Program could be an important financing option for many companies.The Main Street Lending Program has $75 B to serve as a base to leverage up to $600 B in liquidity to participating lenders for loans to companies with up-to 10,000 employees. Businesses have been hit with unprecedented shortfalls to due to economic fallout caused by the COVID19 outbreak. The new main street lending program for businesses is one of many initiatives already underway by the Federal Reserve to support industries, businesses, and state and local governments throughout the country. 

The Main Street Lending Program creates the Main Street New Loan Facility (MSNLF), which is intended to help facilitate new loans to businesses; and  the Main Street Expanded Loan Facility (MSELF), which is intended to help facilitate the extension of already existing loans.  Participating banks will retain a 5% share of the loan and will immediately sell the remaining 95% back to the Federal Reserve through a special purpose vehicle (SPV) created by the Federal Reserve.  These loans are intended to be unsecured, so borrowers and junior secured lenders might consider requiring senior secured lenders making these loans to existing borrowers to affirmatively disclaim any security interests for these loans.

The Main Street Lending Program provides support for eligible small and mid-sized businesses that were in good financial standing before the COVID-19 epidemic with either a new loan under the MSNLF or an increase in size of an existing loan under the MSELF. Businesses may only participate in one of the two Program facilities. General eligibility requirements to participate in the Program are as follows:  

  • 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;
  • The business must have either fewer than 10,000 employees, or less than $2.5 B in 2019 annual revenue;
  • The business must be able to attest that it requires financing due to the exigent circumstances presented by the COVID-19 pandemic, and that it is solvent;
  • The business must make “reasonable efforts” to maintain payroll and retain workers; and
  • The business must comply with all applicable restrictions that apply to direct loan programs under the CARES Act, i.e., compensation, stock repurchase, and dividend restrictions.

Important terms and conditions for the Main Street Loan program include: 

  • Four year term with principal and interest payments deferred for one year;
  • Loan minimum of $1M and maximum is the lesser of $25 million, or an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed four times 2019 EBITDA;
  • Maximum loan size for the upsized existing loan under the MSELF is the lesser of $150 million, 30% of the borrower’s existing outstanding and committed but undrawn bank debt, or an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed six times the borrower’s 2019 EBITDA;
  • Interest rate is an adjustable rate equal to the Secured Overnight Financing Rate (SOFR), plus 250-400 basis points;
  • All loans may be prepaid with no penalty, and there is a fee for loan origination/upsizing and servicing equal to 100 basis points of the principal amount of the eligible new loan or amount of the upsized tranche, respectively. 

The Federal Reserve is utilizing the same “Special Purpose Vehicle” (SVP) created to support other programs in conjunction with the Treasury Department. The SVP will purchase 95% of the loan while the financing institution will hold the other 5%. This program along with others are meant to provide economic relief during the unprecedented virus outbreak. The Federal Reserve has indicated that they will continue to monitor the situation and will work to guard against potential losses by offering new or expanded tools.