Client Alert: Main Street Lending Program Provides Needed Capital to Small and Medium-Size Businesses, Even Those With More Than 500 Employees

Much of the press in recent weeks has focused on the Paycheck Protection Program loans available to small business concerns with less than 500 employees or otherwise generally involved in restaurants, hotels, or franchising. Meanwhile, upper middle-market companies have been awaiting details on lending options to help support their businesses during the COVID-19 pandemic. On April 9, 2020, the Federal Reserve announced the details of this new credit facility (“Main Street Loan”) to companies to either obtain lines of credit or expand existing lines of credit for eligible companies through their existing lenders. Together, through a joint venture with the Treasury Department, the special purpose vehicle (“SPV”) they will create will commit to loan up to $600 billion to companies with less than 10,000 employees or $2.5 billion in 2019 annual revenue who are created or organized in the United States with (i) a majority of U.S.-based employees and (ii) significant operations in the United States. Prospective borrowers may either obtain a new or expanded line of credit under the Main Street Loan program depending on their circumstances and are ineligible to also participate in the Primary Market Corporate Credit Facility, but, if qualified, they can also receive a Paycheck Protection Program loan.

How Does the Program Work?

Qualified borrowers will work with their U.S.-insured financial institution to either obtain or expand an existing line of credit. The SPV will acquire 95% of the value of these incremental loans with the originating bank retaining the balance. The SPV will share the collateral and associated risk on a proportional basis depending on the total value of the credit facility. In the case of the expanded credit facility created under the Main Street Loan, no additional collateral is required. Except for the maximum loan amount, the financial terms for the Main Street Loan are the same regardless of whether it is a new or expanded credit facility, which terms are summarized below:

•  4-year maturity
• Deferred amortization of interest and principal for one year
• Interest rate is an adjustable rate equal to the SOFR + 250-400 basis points. As of March 8, 2020, the SOFR was 0.01% making the current interest rate 2.5% to 4.0%
• Minimum loan amount = $1 million
• Origination fee = 100 basis points of principal amount of the Upside Tranche
• Maximum Loan Amount:
  • New Credit Facility = lesser of:
    • $25 million; or
    • An amount when added to the borrowers’ existing and committed, but undrawn debt, does not exceed 4x borrower’s 2019 EBITDA
  • Expanded Credit Facility = lesser of:
    • $150 million;
    • 30% of borrowers existing outstanding and committed but undrawn bank debt; or
    • An amount when added to the borrowers’ existing and committed, but undrawn debt, does not exceed 6x borrower’s 2019 EBITDA

Additional Restrictions/Certifications

Congress imposed certain restrictions for participating in these loan programs. Accordingly, the prospective borrower for either program must agree/attest to the following:

• The Main Street Loan cannot be used to prepay or refinance existing loans or lines of credit.
• The Main Street Loan cannot be used to prepay or refinancing existing loans or lines of credit.
• The Main Street Loan can only be used to pay mandatory principal payments before the original loan has been repaid in full.
• All lines of credit must be maintained while the Main Street Loan remains outstanding.
• The financing must be due to the circumstances created by the COVID-19 pandemic and the borrower must make reasonable efforts to maintain payroll and employees during the term of the Main Street Loan.
• The borrower must certify the accuracy of the EBITDA leverage conditions.
• The borrower must follow the compensation, stock repurchase, and capital restrictions set forth in the CARES Act for as long as the loan remains outstanding and for 12 months thereafter, which are as follows:

• • Compensation Restrictions. No officer or employee whose total compensation exceeded $425,000 in calendar year 2019, except under certain collective bargain agreements:
    • Will receive more compensation than they received in 2019 or severance or other termination benefits that exceed 2x the employee’s 2019 total compensation; and
    • If an employee received 2019 total compensation in excess of $3 million, they are limited to $3 million and 50% of the excess above $3 million.
    • Total compensation includes all salary, bonus, stock grants, and financial benefits.
  • Capital Distributions. Dividends or other capital distributions with respect to the commons stock of the eligible business are prohibited.
  • Stock Repurchases. Stock repurchases are prohibited.

While lacking the forgivability components of the Paycheck Protection Program loans, the Main Street Loan program provides a middle market borrower with additional low-cost working capital with favorable repayment terms. In the coming days, we expect the Federal Reserve and participating lenders to provide more guidance as to the logistics of the borrowing process. While awaiting the guidance, business executives should commence discussion with their existing lender regarding participation. Legal counsel should be consulted to navigate the impact of a Main Street Loan under existing credit facilities.

If you have questions about any aspect of the Main Street Loan program, the application of the Main Street Loan program to your business, or any business issue you are facing in these unprecedented times, please contact Ritchie Taylor or your Manning Fulton relationship attorney.