Federal Reserve Creates $600B Combined Main Street New Loan Facility and Main Street Expanded Loan Facility

In an effort to support the economy, the Federal Reserve took additional actions on April 9, 2020, to provide loans of up to $600 billion to assist small and midsize employers. Under the Main Street Lending Program, the Federal Reserve Bank will commit to lend to a single common special purpose vehicle (SPV) on a recourse basis, and the Department of the Treasury — using funds from the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) — will provide $75 billion in equity to the SPV.

A. Overview

The Main Street Lending Program, comprising the Main Street New Loan Facility and the Main Street Expanded Loan Facility, will provide loans to small and midsize domestic companies. Eligible lenders may originate new unsecured term loans under the Main Street New Loan Facility or use the Main Street Expanded Loan Facility to increase the size of existing loans to businesses. Such lenders will retain 5 percent of the eligible loan, selling the remaining 95 percent to the SPV, which will purchase up to $600 billion in loans. Borrowers may participate in either the Main Street New Loan Facility or the Main Street Expanded Loan Facility; they are expressly prohibited from participating in both. The full text of the term sheets governing the Main Street Lending Program can be found here: Term Sheet: Main Street New Loan Facility (PDF); Term Sheet: Main Street Expanded Loan Facility (PDF).

B. Main Street Expanded Loan Facility

• Eligible Lender: Eligible lenders are limited to U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies.
• Eligible Borrower: Eligible borrowers are businesses with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues. Each borrower must be a business 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.
• Eligible Loans: Eligible loans under the Main Street Expanded Loan Facility are term loans originated prior to April 8, 2020, by an eligible lender to an eligible borrower. Eligible loans will be an amount not less than $1 million and are capped at the lesser of (x) $150 million, (y) 30 percent of existing debt (including undrawn commitments) and (z) 6x the eligible borrower’s 2019 EBITDA, with leverage calculations to include undrawn commitments and other outstanding debt and EBITDA defined as earnings before interest, taxes, depreciation and amortization (not adjusted or pro forma EBITDA).
• Collateral: Any collateral securing an eligible loan under the Main Street Expanded Loan Facility, whether pledged under the original terms of the underlying loan or at the time of upsizing, will secure the upsizing.
• Term of Facility: Eligible loans mature in four years. The SPV will cease purchasing participations in eligible loans on Sept. 30, 2020, unless the Federal Reserve and the Treasury Department extend beyond such date. The Federal Reserve will continue to fund the SPV beyond Sept. 30, 2020, until the SPV’s underlying assets mature or are sold.
• Repayment: Principal and interest payments will be deferred for one year. Prepayments of the Main Street Expanded Loan are to be permitted without penalty.
• Interest: All loans under the Main Street Expanded Loan Facility will bear interest at an adjustable rate of SOFR plus 250 – 400 basis points.
• Fees: Eligible borrowers will pay eligible lenders a fee of 100 basis points on the principal amount of the upsize tranche in the eligible loan at the time of upsizing. The SPV will further pay eligible lenders 25 basis points of the principal amount of its participation in the loan per annum for loan servicing.
• Return: For example, assuming interest at 400 basis points, a single originating lender holding $5 million of a $100 million loan under the Main Street Expanded Loan Facility could yield 13.75 percent per annum ((sum of (interest amount equal to $5 million * 400 bps per annum) + (annualized fee amount equal to $100 million * (100 bps/4) per annum) + (SPV fee amount equal to $95 million * 25 basis points per annum)) divided by the loan amount held by the lender, $5 million).

C. Main Street New Loan Facility

• Eligible Lender: Eligible lenders are limited to U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies.
• Eligible Borrower: Eligible borrowers are businesses with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues. Each borrower must be a business 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.
• Eligible Loans: Eligible loans under the Main Street New Loan Facility are unsecured term loans originated on or after April 8, 2020, by an eligible lender to an eligible borrower. Such loans will be an amount not less than $1 million and are capped at the lesser of (x) $25 million and (y) 4x the eligible borrower’s 2019 EBITDA, with leverage calculations to include undrawn commitments and other outstanding debt and EBITDA defined as earnings before interest, taxes, depreciation and amortization (not adjusted or pro forma EBITDA).
• Term of Facility: 4 year maturity. The SPV will cease purchasing participations in eligible loans on Sept. 30, 2020, unless the Federal Reserve and the Treasury Department extend beyond such date. The Federal Reserve will continue to fund the SPV beyond Sept. 30, 2020, until the SPV’s underlying assets mature or are sold.
• Repayment: Principal and interest payments will be deferred for one year. Prepayments of the Main Street New Loan are to be permitted without penalty.
• Interest: All loans under the Main Street New Loan Facility will bear interest at an adjustable rate of SOFR plus 250 – 400 basis points.
• Fees: Eligible borrowers will pay eligible lenders an origination fee of 100 basis points of the principal amount of the eligible loan. The SPV will further pay eligible lenders 25 basis points of the principal amount of its participation in the loan per annum for loan servicing. Unlike the Main Street Expanded Loan Facility, the Main Street New Loan Facility requires eligible lenders to pay the SPV a facility fee of 100 basis points of the principal amount of the loan participation purchased by the SPV, which may be passed on to the borrower. Thus, unlike the Main Street Expanded Loan Facility, where the eligible borrower would pay a 1 percent fee on the eligible loan, the Main Street New Loan Facility could require such borrower to pay up to 2 percent in fees (1 percent origination fee on the eligible loan paid to lender and the 1 percent pass-through facility fee on the 95 percent participation to the SPV).
• Return: For example, assuming interest at 400 basis points and that the facility fee is passed on to the borrower, a single originating lender holding $1.25 million of a $25 million loan under the Main Street New Loan Facility could yield 13.75 percent per annum ((sum of (interest amount equal to $1.25 million * 400 bps per annum) + (annualized fee amount equal to $25 million * (100 bps/4) per annum) + (SPV fee amount equal to $23.75 million * 25 basis points per annum)) divided by the loan amount held by the lender, $1.25 million).

Alternatively, presuming the facility fee is not passed on to the borrower, 9 percent per annum ((sum of (interest amount equal to $1.25 million * 400 bps per annum) + (annualized fee amount equal to $25 million * (100 bps/4) per annum) + (SPV fee amount equal to $23.75 million * 25 basis points per annum) – (Facility fee payable by lender to SPV in an amount equal to $23.75 million * (100 bps/4) per annum)) divided by the loan amount held by the lender, $1.25 million).

D. Restrictions on Use of Proceeds and Other Requirements Applicable to the Main Street Loans

• Restrictions on Use of Proceeds: Proceeds of the Main Street Lending Program may not be used to repay or refinance preexisting loans or lines of credit.
• Restrictions on Prepayments and Modifications of Debt: With the exception of mandatory principal payments, eligible borrowers may not repay other debt of equal or lower priority unless the Main Street Lending Program loan is paid in full, and eligible lenders are prohibited from canceling or reducing any existing lines of credit outstanding to such borrower.
• Employee Retention: Eligible borrowers must commit to make reasonable efforts to maintain payroll and retain workers.
• Compliance With the CARES Act: Eligible borrowers must abide by compensation, stock repurchase and dividend restrictions that apply to direct loan programs under the CARES Act. Specifically:
  • Stock Buybacks: Companies that receive loans are subject to a ban on purchasing equity securities listed on a national exchange of the company or a parent company through the life of the loan, plus one year, except to the extent required by preexisting contracts.
  • Dividends: Companies that receive loans cannot pay dividends or other capital distributions on common stock for the life of the loan, plus one year.
  • Compensation Limits: For companies that receive loans, officers and employees who received more than $425,000 in compensation in 2019 cannot receive more than their 2019 compensation during any 12-consecutive-month period and cannot receive severance pay of more than twice their 2019 compensation. Officers and employees who received more than $3 million in 2019 cannot receive more than $3 million plus 50 percent of their excess compensation over $3 million.