Regulatory and Tax Updates
Navigating the Main Street Lending Program
- There are three loan facilities available as part of the Main Street Lending Program.
- The three facilities have some similarities, but also some key differences to consider.
- Organizations can start preparing their strategy for application to the program now.
On April 30, 2020, the Federal Reserve released term sheets and a frequently asked questions (FAQ) document as it announced an expanded scope for its Main Street Lending Program (MSLP). In response to more than 2,200 comment letters, the revised program includes an additional loan facility, modified loan sizing, and expanded eligibility in comparison to the original term sheets released on April 9, 2020.
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The program can serve as an alternative to the Economic Injury Disaster Loan (EIDL) and the Paycheck Protection Program (PPP) or a supplement for organizations that have already applied to the PPP, as they are also eligible for a loan through one of the three MSLP options. A start date for the program has yet to be determined.
The MSLP Facilities
The MSLP Facilities (the “Facilities”) listed below were created to support small to medium-sized businesses that were impacted by the COVID-19 pandemic and either were unable to access the Paycheck Protection Program (PPP) or require support in addition to their PPP loan. Unlike PPP loans, loans made under these facilities are not guaranteed by the government, do not contain a forgiveness feature, and allow for medium-sized business participation. The Facilities include:
Main Street New Loan Facility (MSNLF) — Extends new adjustable rate loans to eligible borrowers with a four-year maturity, a deferral of payments for the first year, and consistent principal amortization over the remaining three years.
Main Street Priority Loan Facility (MSPLF) — Extends new loans to eligible borrowers with the same maturity and rate as MSNLF, but it utilizes a higher adjusted EBITDA calculation, principal amortization is more heavily weighted to maturity, it has different subordination terms, and it has a limited ability to refinance existing debt at origination.
Main Street Expanded Loan Facility (MSELF) — Extends an increase (“upsized tranche”) to an existing term loan or revolving credit facility of an eligible borrower. The maturity and rate are the same as MSNLF and MSPLF. It also retains the same adjusted EBITDA calculation and principal amortization as MSPLF, while providing a much larger maximum loan amount. However, it does not provide the same limited ability to refinance existing debt as MSPLF.
Common features of all Facilities
Eligible lenders, applications, and underwriting
- The Facilities all utilize the same pool of eligible lenders.
- Eligible lenders include, in general, banks, savings associations, and credit unions.
- Eligible lenders will apply their own underwriting standards to loan applicants, documentation requests, and evaluations of financial condition and creditworthiness.
- Meeting the requirements to be considered an eligible borrower for these Facilities does not mean the applicant will be approved for a loan or for the maximum allowable amount.
Types of businesses that qualify
While the term sheets permit other forms of organization to be considered for inclusion as eligible under the Facility at the discretion of the Federal Reserve, they specifically define a business of an eligible borrower as an entity that is:
- Organized for profit as a partnership
- An association
- A joint venture with no more than 49 percent participation by foreign business entities
- A limited liability company
- A trust
- A corporation
- A cooperative
- A tribal business concern as defined in 15 U.S.C. § 657a(b)(2)(C)
The following eligibility requirements for borrower businesses are the same for each of the three Facilities:
- Was established prior to March 13, 2020;
- Not an ineligible business as defined by the PPP on or before April 24, 2020;
- 15,000 or less employees or $5 billion or less of revenues for eligible borrower’s 2019 fiscal year end;
- Employee count should use the average total of persons employed (full-time, part-time, seasonal, and otherwise employed) by the eligible borrower and its affiliates for the 12-month period prior to origination. Employee count should exclude volunteers and independent contractors.
- 2019 fiscal year end revenues should include the revenues of affiliates and can be determined utilizing:
- Audited financial statements prepared in accordance with Generally Accepted Accounting Principles
- Annual receipts reported to the IRS
- Prior year audited financial statements or annual receipts, if 2019 reports are not yet available
- Created or organized in the United States or under the laws of the United States, with significant operations in the United States and the majority of its employees in the United States;
- Not participating in more than one of these three Facilities, or the Primary Market Corporate Credit Facility; and
- Has not received specific support pursuant to the Coronavirus Economic Stabilization Act of 2020 (Subtitle A of Title IV of the CARES Act). If eligible borrower or its affiliates received a PPP loan, they can also receive a loan from one of these three Facilities, provided they are eligible borrowers.
The definition of an ineligible business for these Facilities is derived from the SBA guidelines of businesses that are ineligible for SBA business loans in 13 CFR 120.110, with exceptions for nonprofit businesses and businesses principally engaged in teaching, instructing, counseling, or indoctrinating religion or religious beliefs, whether in a religious or secular setting.
The frequently asked questions for the MSLP dated April 30, 2020 state that nonprofit organizations are not eligible and acknowledge that EBITDA-based loan sizing criteria for these Facilities are generally not used to evaluate nonprofit organizations.
The Federal Reserve has recognized that nonprofit organizations play a critical role in the economy and is evaluating a separate approach to meet their needs.
Borrower certifications and covenants
The eligible borrower should expect to provide any required certifications and covenants to the eligible lender at or before origination. The April 30, 2020 term sheets include the following required certifications and covenants applicable to all three Facilities:
- The eligible borrower must commit that it will not seek to cancel or reduce any of its committed lines of credit with the eligible lender or any other lender.
- The eligible borrower 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.
- The eligible borrower must commit 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, with an exception for an S corporation or other tax pass-through entity that may make distributions to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings.
- Compensation restrictions applicable to officers and employees of the eligible borrower from the date of origination and continuing until 12 months after the loan is no longer outstanding include limits on total compensation, severance pay, or other termination benefits.
- Stock repurchase restrictions from the date of origination and continuing until 12 months after the loan is no longer outstanding include a prohibition on the purchase of equity securities listed on a national securities exchange of (1) the business receiving the loan or (2) any parent company of the business while the direct loan is outstanding, except to the extent required under a contractual obligation in effect as of the date of enactment of the CARES Act (March 27, 2020).
- Capital distribution restrictions from the date of origination and continuing until 12 months after the loan is no longer outstanding, except as noted above, including no payment of dividends or other capital distributions with respect to the common stock of the business receiving the loan.
- The eligible borrower must certify that it is eligible to participate in the Facility, including in light of the conflicts of interest prohibition in section 4019(b) of the CARES Act.
Also, while not specifically included as a required certification, each eligible borrower should make commercially reasonable efforts to maintain its payroll and retain its employees during time the loan is outstanding.
Detailed comparison of Facilities
The following chart highlights the key terms of each Facility and certain features that are unique to each Facility:
|New (MSNLF)||Priority (MSPLF)||Extended (MSELF)|
|Program Funding||$600 billion across all three Facilities|
|Eligible Lenders||Banks, savings associations, and credit unions|
|Loan Origination Date||Originated April 24, 2020 or later||Originated April 24, 2020 or later||Originated on or before April 24, 2020|
|Terms||4 year maturity
1 year deferral of principal and interest payments with unpaid interest capitalized
Adjustable interest rate
LIBOR (1 or 3 month) plus 3.00%
|Principal amortization as follows:
1/3 at end of year 2
1/3 at end of year 3
1/3 at maturity
|Principal amortization as follows:
15% at end of year 2
15% at end of year 3
70% at maturity
|Minimum Loan Amt||$500,000||$500,000||$10 million|
|Maximum Loan Amt||Lesser of the following:
1) $25 million or
2) Amount equal to four times 2019 FYE adjusted EBITDA less existing outstanding and undrawn available debt
|Lesser of the following:
1) $25 million or
2) Amount equal to six times 2019 FYE adjusted EBITDA less existing outstanding and undrawn available debt
|Lesser of the
1) $200 million
2) Amount equal to six times 2019 FYE adjusted EBITDA less existing outstanding and undrawn available debt, or
3) 35% of eligible borrower’s existing outstanding and undrawn available debt that is pari passu in priority with the eligible loan and equivalent in secured status (secured vs. unsecured)
|Note: Adjusted EBITDA for MSNLF and MSPLF is defined as the methodology used by the eligible lender when extending credit to the Eligible Borrower or similarly situated borrower on or before April 24, 2020. Adjusted EBITDA for MSELF is defined as the methodology used by the eligible lender when originating or amending the underlying loan on or before April 24, 2020.|
|Subordination||Not contractually subordinated in terms of priority to any other loans or debt instruments at the time of origination or at any time during the term of the loan||In terms of priority and security, this loan must be senior to or pari passu with, other loans or debt instruments (other than mortgage debt) at the time of origination and at all times this loan is outstanding||In terms of priority and security, the upsized tranche must be senior to or pari passu with, other loans or debt instruments (other than mortgage debt) at the time of upsizing and at all times this upsized tranche is outstanding|
|Prepayment||Permitted without penalty|
|Ability to Pay Other Debt||Until this loan is paid in full, eligible borrower must commit to refrain from repaying the principal or any interest that is not mandatory and due on any other debt.||Until this loan is paid in full, eligible borrower must commit to refrain from repaying the principal or any interest that is not mandatory and due on any other debt. However, at the time of MSPLF loan origination, the eligible borrower may refinance existing debt owed to a lender other than the Eligible Lender of their MSPLF loan.||Until this upsized tranche is paid in full, eligible borrower must commit to refrain from repaying the principal or any interest that is not mandatory and due on any other debt.|
|Borrower Fees||Up to 1.00% of the principal amount at the time of origination. The eligible lender may also require the eligible borrower to pay the transaction fee of 1.00% of the principal amount at the time of origination owed to the special purpose vehicle by the eligible lender.||Up to 1.00% of the principal amount at the time of origination. The eligible lender may also require the eligible borrower to pay the transaction fee of 1.00% of the principal amount at the time of origination owed to the special purpose vehicle by the eligible lender.||Up to 0.75% of the upsized tranche amount at the time of upsizing. The eligible lender may also require the eligible borrower to pay the transaction fee of 0.75% of the upsized tranche amount at the time of upsizing owed to the special purpose vehicle by the eligible lender.|
Take action now
Banks are still looking for guidance on how to process the MSLP and for the start date. While the banks are getting organized, reach out to your banker and let them know you will be applying for a program. Pull your financial information together and meet with your CLA advisors to strategically look at your needs and choose the program best suited for your situation.
How we can help
We’re here to help you through this complex, rapidly changing environment. Whether you’re considering MSLP, EIDL, PPP, grants, or other financing, CLA is ready to help you navigate the process. We will work together with you to understand your unique situation, strategize on immediate business decisions, and help you to pull together the information necessary for you to submit your loan application.
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