CARES Act Insights: Federal Reserve Set to Launch Main Street Lending Program for Small- and Medium-Sized Businesses
Miller & Martin PLLC Alerts | June 02, 2020
Author: Thomas Schramkowski
Jerome Powell, Chairman of the Federal Reserve, indicated that the Fed is “days away” from launching its Main Street Lending Program (the “Program”) for making loans available to small- and medium-sized businesses harmed by the coronavirus pandemic. In support of the Program, the Federal Reserve Bank of Boston has established a special purpose vehicle (“SPV”) that will purchase participations in loans originated by eligible lenders for eligible borrowers, with each lender retaining as little as 5% of such loans. Importantly, companies that received Small Business Administration loans under the Paycheck Protection Program (“PPP”) are still eligible for loans under the Program.
Lenders eligible to participate in the Program include U.S. banks and bank holding companies, savings associations and savings and loan holding companies, credit unions, and U.S. branches of foreign banks, but expressly exclude nonbank financial institutions. Eligible borrowers are U.S. for-profit businesses with 15,000 or fewer employees or up to $5 billion in 2019 revenues. Loans are eligible for the Program so long as, amongst other criteria, the principal amount of the loan equals or exceeds $500,000 for new loans and $10 million for expanded loans of additional funds under already existing borrower credit facilities, with maximum loan amounts determined by a pro forma leverage test (subject to an overall maximum principal amount of $25 million for new loans and $200 million for expanded loans). For more detailed information on the scope and terms of the various loans, please see Miller & Martin’s prior client alert on the Program.
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 SPV will cease purchasing participations on September 30, 2020, subject to any extensions by the Federal Reserve or the Treasury Department.
The Federal Reserve has established a “lenders page” on its website, which provides interested lenders with information regarding the terms of each loan type and tools for the origination and administration of the loans. From the lenders page, lenders can access term sheets for each loan type as well as frequently asked questions (“FAQs”) which provide a deeper analysis of the terms. The lenders page also includes links to: forms of the participation agreement and the loan servicing agreement to be entered into by lenders and the SPV; certifications and covenants required to be made by lenders when registering for the Program and upon the SPV’s purchase of a loan participation; a list of the borrower certifications and covenants to be made upon loan origination; a Loan Document Checklist of the terms that must be incorporated into the lenders’ own loan documentation used to originate Program loans; and a list of the annual and quarterly financial reporting requirements that must be enforced by lenders.
The Federal Reserve also has established a “borrowers page” on its website, which contains information that businesses should reference in determining their eligibility as borrowers under the Program and whether the terms and requirements of the Program loans are suitable for their respective businesses. The borrowers page includes the same term sheets and FAQs referenced on the lenders page, but borrowers also should review the Loan Document Checklist, the borrower certifications and covenants, and the financial reporting requirements included on the lenders page for a more concise summary of the terms of each Program loan and the requirements applicable to borrowers.
A few final notes on the Program:
- Even though the bar for eligibility to receive Program loans is relatively low, the terms and restrictions under the loans themselves may not appeal to all businesses. More so than PPP loans, the terms of program loans will restrict the ability of borrowers, during the term of the loan and for one year after repayment, to take certain actions in conducting their businesses, including paying dividends and making distributions to equity owners and compensating individual officers and employees above certain salary and benefit thresholds. Further, unlike PPP loans, the principal amount of Program loans are not subject to loan forgiveness, such that borrowers will be obligated to repay the full principal amount plus interest incurred (at an adjustable rate based on LIBOR (1 or 3 month) plus 300 basis points). Businesses, therefore, should carefully review the terms of these loans and work with their financial advisors and relationship banks to determine whether Program loans are a good fit or whether other, perhaps more suitable options, are available.
- Borrowers interested in obtaining a Program loan should familiarize themselves with the various loan types and terms using the tools accessible via the borrowers page, and should immediately reach out to their relationship banks to determine whether those banks will be participating in the Program. Interested borrowers should also consider registering for the Federal Reserve’s “Ask the Fed” live webinar at 2:00 p.m. EDT on Wednesday, June 3, 2020 to learn more about the Program. The borrowers page includes a link for use by interested borrowers in registering for the webinar.
- The Federal Reserve is also hosting an “Ask the Fed” live webinar at 2:00 p.m. EDT on Thursday, June 4, 2020 designed specifically for lenders interested in participating in the Program. The lenders page includes a link for use by eligible lenders to register for the webinar, which requires creating or logging in via a user account established with the Federal Reserve.
For more information about the ongoing developments related to the COVID-19 pandemic, please visit Miller & Martin's Coronavirus Resources.