On April 9, the Federal Reserve and Treasury Departments announced the establishment of a new program to aid small to medium-sized businesses in need of financial assistance because of COVID-19 (including some mid-sized businesses not eligible for loans under CARES Act loan programs). It’s called the Main Street Lending Program (MSLP). Under the program, the Federal Reserve will purchase up to $ 600 billion in loans. The initial equity investment is being made by the Treasury Department using funds allocated by the CARES Act.
When the terms of the program were first announced, the Federal Reserve indicated that it was seeking feedback from the public on potential refinements. More than 2,200 letters were received. In response, on April 30, the Federal Reserve announced it is expanding the scope and eligibility for the Main Street Lending Program. The Federal Reserve again consulted with banks and businesses and on June 8 announced further changes to the program to allow more businesses to be able to receive support. Although the Federal Reserve can be expected to provide further guidance, below are some of the main points of what has been announced, including the refinements announced on April 30 and the further refinements announced on June 8.
Three new loan facilities created
- There will be three facilities established by the Federal Reserve under the authority of Sec. 13(3) of the Federal Reserve Act. The Main Street New Loan Facility (MSNLF) will provide for newly originated loans for eligible businesses. The Main Street Expanded Loan Facility (MSELF) will allow eligible businesses to extend existing loans. The Main Street Priority Loan Facility (MSPLF) is a facility for borrowers with greater leverage.
- All three facilities use the same lender and borrower criteria and have many of the same features. Some features of the loans differ, however, including differing in how they interact with the borrower’s existing outstanding debt, including with respect to the level of pre-crisis indebtedness the borrower may have incurred.
- Under the MSNLF, the Federal Reserve may purchase loans originated after April 24, 2020, that are between $250,000 and $35 million. Under the MSPLF, the Federal Reserve may purchase loans originated after April 24 that are between $500,000 and $25 million. Under the MSELF, the Fed may purchase loans originated on or before April 24, 2020, that are between $10 million and $300 million.
- Lenders retain 5% of the loans made under the program. The other 95% is sold to a special purpose vehicle established by the Federal Reserve.
Eligible borrowers and lenders
- Main Street loans are available to U.S. businesses established before March 13, 2020.
- Eligible borrowers are businesses employing up to 15,000 workers or having up to $5 billion in 2019 annual revenue.
- The borrower must have been in sound financial condition prior to the onset of the COVID-19 pandemic.
- Eligible lenders are U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies.
Some of the loan details
- The term of the loan is 5 years
- Principal payments are deferred for 2 years and interest payments are deferred for one year
- The interest rate is LIBOR plus 3%
- Prepayment is permitted without penalty
What are some other things businesses need to know?
- The loans are subject to most of the same conditions and restrictions set forth for loans established by the CARES Act such as restrictions on compensation, stock repurchases, and dividends
- Borrowers must attest that their need for the loan arose due to COVID-19
- Borrowers must agree to make good faith efforts to maintain payroll and retain employees
- Various other attestations are required as well
- Participation in both the MSLP and the CARES Act’s Paycheck Protection Plan is permitted
- Businesses may not obtain loans from more than one of the Main Street facilities
- The loans are not forgivable
- The Main Street special purpose vehicle will cease purchasing loans on September 30, 2020, unless the Program is extended by the Federal Reserve Board and the Treasury Department
The Main Street Lending Program may be an important option for small and mid-size businesses, and especially those mid-size businesses that are not eligible for the loan programs established by the CARES Act. More information about the program, including term sheets for each facility and FAQs, can be obtained from the Federal Reserve’s website here https://www.federalreserve.gov/monetarypolicy/mainstreetlending.htm
For questions, contact us by calling 1-855-463-9136 or send an email for assistance.