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.  But what about a business that does not qualify as a small business with 500 to 10,000 employees? 

There are benefits earmarked specifically for mid-sized businesses under the Emergency Relief and Taxpayer Protections section of the CARES Act. However, there are conditions that management and owners of eligible businesses should be aware of before diving in. And unlike the Paycheck Protection Program (PPP) loans, these cannot be reduced through forgiveness and are not subject to the affiliation rules.

Main Street Business Lending Program

There are two tranches available under the Main Street Business Lending Program which have been designated as the Main Street New Loan Facility (MSNLF) and the Main Street Expanded Loan Facility (MSELF).  The Department of the Treasury, using funds appropriated by the CARES Act, in a single common Special Purpose Vehicle (SPV) intended to facilitate lending to small and medium-sized businesses by eligible lenders for a combined size of $600 billion, of which the SPV will participate in 95 percent of either the new loan or the extended upsized tranche.  The lenders will retain the remaining 5 percent.

Who is eligible to borrow?

Eligible borrowers are businesses with up to 10,000 employees or up to $2.5 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 10,000 employees and revenues under the $2.5 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 8, 2020. Whereas an expanded loan is a term loan made by an eligible lender that was originated before April 8, 2020, provided the upsized tranche of the loan has the appropriate features as described below.

Whether you borrow under the MSNLF or the MSELF program, the new loan or extended loan tranche, respectively, will have a four-year maturity, with amortization of principal and interest deferred for one year, at the Secured Overnight Financing Rate (SOFR) plus 2.5 percent to 4 percent.  The current SOFR rate is 0.1 percent.  There are no prepayment penalties. 

Loans must be a minimum of $1 million and the maximum loan size is based on the following formulas:

  • Under MSNLF, the maximum loan size is the lesser of: (i) $25 million or (ii) an amount that, when added to the borrowers existing outstanding debt and committed but undrawn debt, does not exceed four times 2019 EBITDA. 
  • Under MSELF, the maximum loan size is the lesser of: (i) $150 million, (ii) 30 percent of the borrowers existing outstanding and committed but undrawn bank debt, or (iii) an amount that, when added to the borrowers existing outstanding and committed but undrawn debt, does not exceed six times the borrowers 2019 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:

  • Under the MSNLF, an eligible lender will pay the SPV a facility fee of 100 basis points of the principal amount of the loan participation purchased by the SPV. The lender may require the borrower to pay this fee.
  • Under both the MSNLF and MSELF, a borrower will pay an eligible lender an origination or upsizing fee of 100 basis points of the principal amount of the loan. The SPV will pay the lender 25 basis points of the principal amount of its participation in the loan per annum for loan servicing.

The specific process has yet to be announced and the application form has yet to be released.  SPV will cease purchasing participation is eligible loans on Sept. 30, 2020, unless further extended. 

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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