On April 9, 2020, the Federal Reserve issued a press release announcing that it would be seeking to undertake additional actions to provide up to $2.3 trillion in loans to support the economy. A comprehensive overview of the actions taken by the Federal Reserve can be found here. The Federal Reserve notes that their actions will:
- supply liquidity to participating financial institutions through the Paycheck Protection Program Liquidity Facility (PPPLF) to extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value;
- ensure credit flows to small and mid-sized businesses with the purchase of up to $600 billion in loans through a single common special purpose vehicle created under the Main Street Lending Program (Main Street SPV), which will be backed by $75 billion in equity from the Department of the Treasury using funds appropriated by the CARES Act;
- increase the flow of credit to households and businesses through capital markets, by expanding the size and scope of the Primary and Secondary Market Corporate Credit Facilities (PMCCF and SMCCF) as well as the Term Asset-Backed Securities Loan Facility (TALF), which will now support up to $850 billion in credit backed by $85 billion in credit protection provided by the Treasury using funds appropriated by the CARES Act; and
- help state and local governments manage cash flow stresses caused by the coronavirus pandemic by establishing a Municipal Liquidity Facility that will offer up to $500 billion in lending to states and municipalities, backed by $35 billion in credit protection provided by the Treasury using funds appropriated by the CARES Act.
The facilities targeting capital markets will be mostly available and helpful for financial institutions and large investment grade companies which have received a credit rating of at least BBB-/Baa3 from a major nationally recognized statistical rating organization (NRSRO) and, if rated by multiple major NRSROs, rated at least BBB-/Baa3 from two or more NRSROs.
Of particular interest to the mid-sized businesses employing up to 10,000 employees or with revenues up to $2.5 billion in 2019 annual revenues are the Main Street Lending Program and the Mid-Sized Business Facility which was separately provided for under Section 4003(c)(3)(D) of the CARES Act. The Treasury and the Federal Reserve are expected to provide further guidance in the coming weeks for the Main Street Lending Program as they also implement the Mid-Sized Business Facility.
The Main Street Lending Program consists of:
- Main Street Expanded Loan Facility (MSELF), which is intended to facilitate upsizing an existing term loan made by an eligible lender to an eligible borrower that was originated before April 8, 2020; and
- Main Street New Loan Facility (MSNLF), which is intended to facilitate new lending in the form of an unsecured term loan from eligible lenders to eligible borrowers on or after April 8, 2020.
Eligible lenders are U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies. Eligible borrowers with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues must be a business that is created or organized in the United States or under the laws of the United States with significant operations in and a majority of its employees based in the United States.
The Federal Reserve notes that the banks originating Main Street loan facilities will retain 5% of each eligible loan, selling 95% participations to the Main Street SPV, which will purchase up to $600 billion of eligible loans. As noted by the Federal Reserve, the Main Street Lending Program is still being finalized and further guidance will be developed in part based on the feedback from lenders, borrower, and other stakeholders. The Federal Reserve is seeking comments by April 16, 2020.
For now, the main features of the borrower eligibility requirements and the terms of the eligible loans are provided in the term sheets for MSELF and MSNLF. Companies seeking MSELF and MSNLF must commit, among other things, to make reasonable efforts to maintain payroll and retain workers and to follow compensation, stock repurchase, and dividend restrictions that apply to direct loan programs under the CARES Act. For the full list of required attestations, please refer to the term sheets posted by the Federal Reserve.
While the companies that have taken advantage of the PPP loan may also take out Main Street loans, they will not be able to take advantage of both MSELF and MSNLF. The eligible borrowers will only be allowed to take either MSELF or MSNLF, as applicable.
For MSELF and MSNLF, main features of the loans are:
- 4 year maturity;
- amortization of principal and interest deferred for one year;
- adjustable rate of SOFR + 250-400 basis points;
- minimum loan size of $1 million;
- maximum loan size that is (a) 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 EBITDA for MSNLF or (b) 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 EBITDA for MSELF; and
- prepayment permitted without penalty.
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