CARES Act Insights: Federal Reserve Announces Expanded Terms for Main Street Lending Program Available to Small- and Medium-Sized Businesses

Miller & Martin PLLC Alerts | May 14, 2020

The Federal Reserve has announced changes to its Main Street Lending Program (the “Program”) that will make loans more widely available to small- and medium-sized businesses harmed by the coronavirus pandemic.  In response to widespread feedback on the Program from businesses and banks, the Fed released new term sheets and a list of frequently asked questions ("FAQs") which both expand the loan terms and provide more clarity on several of the details of the Program.  As described in greater detail in Miller & Martin’s prior client alert on the Program, the Federal Reserve Bank of Boston will establish a special purpose vehicle (“SPV”) under the Program that will purchase participations in loans originated by eligible banks, with each bank retaining as little as 5% of such loans.  The $600 billion Program is supported by $75 billion in equity provided by the U.S. Department of the Treasury out of a pool of $500 billion reserved under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).

In addition to lowering the minimum amount of eligible loans, raising the maximum loan amount and increasing the limit on the number of individuals employed by eligible borrowers, the changes made to the Program by the Federal Reserve also include the creation of a third loan facility.  Under the Program, banks originate new loans (“New Loans”) and lend additional funds under existing credit facilities (“Expanded Loans”), both of which were established under the original terms of the Program, and the Fed has now added a third option (“Priority Loans”) in which banks retain a larger participation in the loans in exchange for the ability to lend to businesses carrying greater debt amounts.

The following summary describes the significant details of the three loan programs (and notes in parentheses material changes made by the Fed to the original loan terms) based on the newly released Term Sheets and FAQs:

  • Eligible Borrowers: Eligible borrowers are (subject to certain excluded businesses, such as banks, pawn shops, life insurance companies, and others) for-profit companies in existence prior to March 13, 2020 with 15,000 or fewer employees (formerly 10,000 or fewer) or up to $5 billion (formerly $2.5 billion) in 2019 revenues (the FAQs make clear that employee counts and revenues are aggregated with affiliates, which, as lamented by commentators, could exclude a number of portfolio companies of private equity firms). Each borrower must also be a U.S. entity with “significant” operations and a majority of its employees based in the U.S., and must have been in “sound financial condition” prior to the coronavirus outbreak.  In the new Term Sheets, the Fed makes clear that eligible joint ventures (which it treats differently than corporations, limited liability companies, and other entities) cannot have more than a 49% foreign ownership interest, which seems to indicate that non-joint venture entities which are otherwise eligible will not be excluded from participation even if they are entirely foreign-owned.  The new Term Sheets also add that any debt owed by the borrower to the Program lender existing as of December 31, 2020 must have been rated internally by the lender on that date with the equivalent of a “pass” under standards used by the Federal Financial Institutions Examinations Council (FFIEC).  Importantly, the new Term Sheets indicate that non-profit organizations are not eligible borrowers; however, the Fed announced that it is considering separate programs “to meet their unique needs.”

  • PPP Borrowers Eligible: Importantly, and as now made clear in the revised Term Sheets, companies that received Small Business Administration loans under the Paycheck Protection Program (“PPP”) created under the CARES Act are also eligible for loans under the Program.

  • Size of Loans: New Loans and Priority Loans eligible for purchase under the Program must be for a principal amount of not less than $500,000 (formerly $1 million for New Loans), while the minimum principal amount for Expanded Loans is now $10,000,000 (formerly $1 million). Maximum loan amounts are determined in part on a pro forma leverage test as follows:

    • For New Loans, the principal amount must not exceed the lesser of $25 million and an amount that, when added together with the borrower’s “outstanding and undrawn available debt” (which includes bank, non-bank and private debt, as well as publicly issued bonds and private placement facilities), does not exceed four times the borrower’s 2019 EBITDA (formerly, this parameter captured all unused commitments, but now provides exclusions for, among others, backup lines of credit and undrawn commitments for financing receivables).

    • For Priority Loans, the principal amount must not exceed the lesser of $25 million and an amount that, when added together with the borrower’s “outstanding and undrawn available debt” (see detail above), does not exceed six times the borrower’s 2019 EBITDA.

    • For Expanded Loans, the principal amount must not exceed the lesser of (i) $200 million (formerly $150 million), (ii) 35% (formerly 30%) of the borrower’s “outstanding and undrawn available debt” (see detail above), which in this case is pari passu in payment priority and of the same security status (secured vs. unsecured) with the Expanded Loan, and (iii) an amount that, when added together with the borrower’s “outstanding and undrawn available debt,” does not exceed six times the borrower’s 2019 EBITDA. The new Term Sheet for Expanded Loans provides that an eligible underlying loan: must have been originated on or before April 24, 2020; must have a remaining maturity (either on its own or as extended by the Expanded Loan) of at least 18 months; can be part of a multi-lender facility (with the Program lender being the only lender in the syndicate required to meet the eligibility standard); and can be a term loan or a revolving credit facility.

  • SPV Participations: The participations in eligible loans purchased by the SPV remain at 95% for New Loans and for Expanded Loans, but in creating the Priority Loan option, the Fed decreased the participation to 85% and (as noted above) raised the pro forma leverage test to six times EBITDA. This change appears to work a compromise for commentators who pressed the Fed to eliminate or increase the pro forma leverage criteria so lenders themselves could tailor underwriting decisions to each individual borrower.  For all of the Program loans, the SPV and the Program lender share the risk of loss on a pari passu basis.  Further, the new Term Sheets make clear that Program lenders must hold their participation interests until the earlier of maturity of the Program loan or the sale by the SPV of its participation, and that lenders of Expanded Loans must retain their interest in the underlying loan until the earlier of its maturity, the maturity of the Program loan or such sale by the SPV.

  • Priority and Security: New Loans are unsecured or secured (formerly only unsecured loans were eligible) and must not be contractually subordinated at any time to payment under a borrower’s other indebtedness—which, according to the FAQs, still permits a borrower to make payments on junior or pari passu ordinary course debt (such as secured inventory and equipment purchase financing) and to hold other secured debt (even which has a senior lien position) so long as such New Loan does not have lower contractual priority in bankruptcy than the borrower’s other indebtedness (see also “Borrower Certifications” below regarding restrictions on payment of other debt). Priority Loans and Expanded Loans are secured or unsecured loans and must be senior or pari passu in payment priority and security at all times to indebtedness of the borrower other than mortgages.  Finally, the new Term Sheet clarifies that any collateral held by the lender against the underlying loan portion of an Expanded Loan must also secure the Expanded Loan (both at origination and thereafter) on a pro rata basis.

  • Eligible Loan Terms: Eligible Program loans must be term loans originated after April 24, 2020 (or on that date for Expanded Loans) and made to eligible borrowers on the following terms:

    • loans must be made by eligible lenders, which, according to the FAQs, do not at this time include nonbank financial institutions, though the Federal Reserve appears to be considering other facilities for nonbank lenders to participate in;

    • four-year maturity;

    • deferral of amortization of principal and interest for one year—New Loans will be amortized with one-third of principal due at the end of each remaining year, and Priority Loans and Expanded Loans will have a back-end weighted amortization schedule with 15% of principal due at the end of years two and three and 70% due at maturity (formerly, Expanded Loans were amortized similarly to New Loans);

    • an adjustable interest rate based on LIBOR (1 or 3 month) plus 300 basis points (formerly a range of 250-400 basis points based on the Federal Reserve’s Secured Overnight Financing Rate, which commentators criticized for its volatility and the implementation challenges lenders are already facing given its recent adoption as a benchmark rate). Given the phase-out of LIBOR, the FAQs direct Program borrowers and lenders to agree on a backup rate in the event the eligible loan’s maturity outlives LIBOR;

    • no prepayment penalty; and

    • Program lenders must commit to the SPV that they will not (i) “request” borrowers to repay principal or interest on other indebtedness owed to the lenders, other than mandatory payments or as the result of a default, or (ii) cancel or reduce lines of credit already in place with borrowers, except upon an event of default or (as clarified in the FAQs) otherwise in accordance with the terms of the credit facility.

  • Borrower Certifications and Covenants: The Term Sheets indicate that borrowers must make “certifications required by applicable statutes and regulations,” which, in addition to the CARES Act itself, may also be a reference to the Federal Reserve’s regulations under Section 13(3) of the Federal Reserve Act. As provided in the FAQs, Program lenders may rely on the borrower certifications and are not required to independently verify the certifications nor actively monitor compliance.  Borrowers must make the following certifications and covenants, among others, in obtaining any of the Program loans:

    • the borrower must commit to not repaying principal or interest on other indebtedness, except for (i) payments under lines of credit and credit cards, and (ii) mandatory principal and interest payments then due (formerly, permitted payments were limited solely to principal), until its Program loan has been repaid in full, except that borrowers under Priority Loans are permitted at the time of origination to use the proceeds from the Program loan to refinance existing debt with lenders other than the Program lender, though the FAQS expressly permit borrowers under all Program loans to refinance maturing debt;

    • the borrower must commit to not “seek to” cancel or reduce lines of credit already in place with the Program lender or any other lender, though borrowers can continue to make payments thereunder when due;

    • the borrower must certify that after giving effect to the Program loan, it has a reasonable basis to believe that it will be able to meet its financial obligations and does not expect to file bankruptcy over at least the first 90 days following loan origination (this is a new certification added to the Term Sheets);

    • the borrower must use commercially reasonable efforts to maintain payroll and employment levels throughout the term of the Program loan, though it does not appear from the Term Sheets or the FAQs that the loan proceeds must be directed towards those efforts (formerly, the borrower also was required to attest that Program funds were needed as a result of exigent circumstances arising from the coronavirus pandemic, though this certification no longer appears in the Term Sheets);

    • the borrower must commit not to pay (during the term of the loan and for one year after the loan is no longer outstanding) the following to any officer or employee whose total compensation exceeded $425,000 in 2019: (i) compensation in any 12-month period in excess of such 2019 amount, or (ii) severance or other benefits upon termination in excess of twice such 2019 amount, with an ultimate cap on total compensation payable in any 12-month period to such individuals equal to $3 million plus half of the excess total compensation over $3 million; and

    • the borrower must commit not to (during the term of the loan and for one year after the loan is no longer outstanding) (i) repurchase securities of the borrower or its parent on a national securities exchange, or (ii) pay dividends or other distributions to common stockholders, though the new Term Sheets (in response to concerns raised by commentators) specifically exempt the payment of “reasonably required” tax distributions to the owners of pass-through entities, which carveout, by necessity, also seems to extend the CARES Act restriction on payment of non-tax distributions beyond common “stockholders” to equity holders of S-corporations, limited liability companies and partnerships.

  • Fees: Program lenders must pay a one-time facility fee to the SPV equal to 100 basis points on the principal amount of New Loans and Priority Loans and 75 basis point on the principal amount of Expanded Loans (formerly the Expanded Loan facility fee was also equal to 100 basis points), which lenders can pass along to borrowers.  In addition, lenders are permitted to charge borrowers a one-time origination fee of up to 100 basis points on the principal amount of New Loans and Priority Loans and 75 basis point on the principal amount of Expanded Loans (formerly this Expanded Loan fee was also equal to 100 basis points).  Finally, the SPV shall pay an annual servicing fee to lenders under all Program loans equal to 25 basis points on the principal amount of each loan participation purchased.

  • Start Date: The Federal Reserve’s announcement indicates that the Program has not yet been launched, but should be available “soon.”

  • End Date: The SPV will cease purchasing participations on September 30, 2020, subject to any extensions by the Federal Reserve or the Treasury Department.

  • Application Process: Lenders will have access to Federal Reserve guidelines regarding the documentation necessary to complete a participation purchase, though these guidelines are not yet available. Unlike the application process under the PPP, which was the source of considerable confusion, it appears from the FAQs that the Federal Reserve does not intend to publish an application for Program loans—rather, lenders will provide their own applications and apply their own underwriting standards, in addition to the Program’s minimum requirements, in determining eligibility and loan size.  Therefore, interested borrowers should not wait for further guidance from the Federal Reserve, but should reach out now to their relationship banks to determine whether those banks will be participating in the Program.

  • No Loan Forgiveness: Unlike PPP loans, but similar to all loans made under facilities created by the Federal Reserve using funds from the $500 billion pool established by the CARES Act, the principal amount of Program loans are not be subject to loan forgiveness (as now made clear in the FAQs).

  • Taxation: Similar again to all loans made under facilities created by the Federal Reserve using funds from the $500 billion pool established by the CARES Act, loans under the Program shall constitute indebtedness for federal tax purposes (although this is not indicated in the Term Sheets).

We will provide additional updates on the terms of these Program loans and further guidance on obtaining them as more information becomes available.  Below is a link to the Federal Reserve’s Term Sheets for each of the Program facilities:

Main Street New Loan Facility

Main Street Priority Loan Facility

Main Street Expanded Loan Facility


For more information about the ongoing developments related to the COVID-19 pandemic, please visit Miller & Martin's Coronavirus Resources.