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Authored by Brad DeNoyer, Todd Bernhardt and Chad O'Brien

A lot has been written about the benefits to individuals and small businesses under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, especially the forgivable Paycheck Protection Program (PPP) loans. But what about a business with 500 to 15,000 employees that does not qualify as a small business?

Sec. 4003 of the CARES Act (Emergency Relief and Taxpayer Protections) allowed the Federal Reserve to establish a Main Street Lending Program to support lending to small and mid-sized businesses. The program is intended to help companies that were in good financial shape prior to the COVID-19 pandemic to maintain their operations and payroll until conditions normalize.

Management and owners of eligible businesses, however, need to be aware the program’s conditions before diving in. For example, unlike PPP loans, these loans are not forgivable and are not subject to affiliation rules. Since the CARES Act was enacted in March, the Federal Reserve has updated details of the program four times, the last time on June 20.

Main Street Lending Program

There are three tranches available under the Main Street Lending Program: the Main Street New Loan Facility (MSNLF), the Main Street Expanded Loan Facility (MSELF) and the Main Street Priority Loan Facility (MSPLF). All three facilities use the same eligible lender and eligible borrower criteria, and have many of the same features, including the same maturity, interest rate, deferral of principal and interest for one year, and ability of the borrower to prepay without penalty.

The Department of the Treasury, using $75 billion appropriated through the CARES Act, invested in a single common Special Purpose Vehicle (SPV). The SPV will facilitate lending to small and medium-sized businesses by eligible lenders by purchasing up to $600 billion of participations in eligible loans. The SPV will participate in 95% of either the new loan or the extended upsized tranche; the lenders will retain the remaining 5%.

Who is eligible to borrow?

Eligible borrowers are businesses with up to 15,000 employees or up to $5 billion in 2019 annual revenues. There is no minimum as to the number of employees, and it is important to note that it is an “or” condition. (For example, a potential borrower may have more than 15,000 employees but revenues under $5 billion and qualify, or vice versa.) An eligible borrower must be a business created or organized in the United States with significant operations in and a majority of its employees based in the United States.

What are the loan terms and conditions?

A new eligible loan is defined as an unsecured loan made by an eligible lender that was originated on or after April 24, 2020. An expanded loan is a term loan made by an eligible lender that was originated before April 24, 2020, and must have a remaining maturity of at least 18 months.

Regardless of the program you borrow under, the new loan or extended loan tranche, respectively, will have a five-year maturity, with principal payments deferred for two years and interest payments deferred for one year, at the adjustable rate of LIBOR (1 or 3 month) + 300 basis points There are no prepayment penalties.

Minimum and maximum loan sizes depend on the type of loan:

  • MSNLF: minimum loan size of $250,000; maximum loan size is the lesser of (i) $35 million or (ii) an amount that, when added to the borrower’s existing outstanding and undrawn available debt, does not exceed four times the adjusted 2019 EBITDA;
  • MSPLF: minimum loan size of $250,000; maximum loan size is the lesser of (i) $50 million or (ii) an amount that, when added to the borrower’s existing outstanding and undrawn available debt, does not exceed six times adjusted 2019 EBITDA;
  • MSELF: minimum loan size of $10 million; maximum loan is the lesser of (i) $300 million or (ii) an amount that, when added to the borrower’s existing outstanding and undrawn available debt, does not exceed six times adjusted 2019 earnings before interest, taxes, depreciation, and amortization EBITDA)

The borrower must make certain attestations surrounding limitations on using proceeds to repay, refinance, or cancel pre-existing loans or lines of credit. The borrower must attest that it requires financing due to the exigent circumstances presented by the COVID-19 pandemic, and use of the proceeds to make reasonable efforts to maintain its payroll and retain its employees during the term of the loan. In addition, the borrower must attest to follow compensation, stock repurchase and capital distribution restrictions as defined in the applicable section of the CARES Act.

How are the loans originated and serviced?

The loans are subject to prescribed facility and origination fees as follows:

  • For MSNLF and MSPLF loans, an eligible lender will pay the SPV a transaction fee of 100 basis points of the principal amount of the loan at the time of origination. The lender may require the borrower to pay this fee.
  • For MSELF loans, an eligible lender will pay the SPV a transaction fee of 75 basis points of the principal amount of the upsized tranche of the loan at the time of upsizing. The lender may require the borrower to pay this fee.

The Federal Reserve has not announced the specific application process or released the application form. SPV will cease purchasing participation is eligible loans on Sept. 30, 2020, unless further extended.

The Federal Reserve is maintaining an FAQ page on this program.

Baker Tilly expects that the programs will get more definition in the near term. We will continue to provide updates as guidance is released.

Contact a Baker Tilly specialist

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