COVID-19 Relief for Middle Market Companies: The Federal Reserve's Main Street Lending Program under the CARES Act

By David Jenson, Tessa Trelz, David J. Kim and Gerald Weidner

With lending now underway under the well-known Paycheck Protection Program (PPP) established under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) aimed at providing COVID-19 relief to small and medium businesses (those with 500 or fewer employees and certain others in specific qualifying categories), the Federal Reserve turns its attention to a part of the CARES Act targeted specifically at larger middle market companies. The "Main Street Lending Program" (MSL) was announced on April 9, 2020, which included term sheets for two loan facilities: (1) the "Main Street New Loan Facility" (MSNLF) for new loans, and (2) the "Main Street Expanded Loan Facility" (MSELF) for the expansion of existing lines of credit. The Main Street Lending Program is intended to support businesses that were in good financial health before the COVID-19 crisis by offering loans on favorable terms to certain companies committed to make reasonable efforts to maintain payroll and retain workers.

Please contact us if we can assist in your analysis of and potential participation in the Main Street Lending Program. The firm's Coronavirus Task Force is monitoring and prepared to quickly and efficiently respond to questions and ongoing legal issues unique to the coronavirus situation including, but not limited to, employment and labor matters, contract enforcement and force majeure issues and insurance coverages. Please visit our website for information on the task force members and all previously issued COVID-19 alerts.

The Federal Reserve will fund a special purpose vehicle that will purchase 95% participations in MSL loans made by eligible lenders (federally insured depository institutions, bank holding companies, and savings and loan holding companies) to eligible borrowers, with the lender retaining 5% of each eligible loan. The Federal Reserve is seeking comments from lenders, borrowers and other stakeholders on these term sheets until April 16, 2020. This alert is meant to summarize what we know so far about the MSL, and we will supplement this alert as updates from the Federal Reserve are publicly announced. 

Eligibility and Borrower Certifications
  • Employee/Revenue Test: Eligible borrowers are businesses with up to 10,000 employees or up to $2.5 billion in 2019 annual revenue. 
  • U.S. Based: An eligible borrower must be a business created or organized in the U.S. or under the laws of the U.S. It must have significant operations in the U.S., and a majority of its employees must be located in the U.S. Thus far there is no guidance with respect to whether affiliates must be aggregated for purposes of determining eligibility.
  • Borrower Certifications: As with other loan programs under the CARES Act, MSL borrowers will be required to make a number of certifications as a condition to receiving a loan, including that:
    • MSL financing is required due to the pandemic.
    • The borrower will use the proceeds of the MSL loan to “make reasonable efforts to maintain its payroll and retain its employees during the term” of the loan.
    • The borrower will abide by the compensation, stock repurchase and capital distribution restrictions that apply to direct loan programs under the CARES Act (discussed below).
    • The borrower is eligible to participate under MSL program rules and guidelines (yet to be published in their entirety).
Loan Terms
  • General Terms: MSL loans will have a term of four years, and amortization of principal and interest will be deferred for one year. The loans will be unsecured and will allow for prepayment without penalty. Unlike the PPP loans for small businesses, loans provided under the MSL are not eligible for loan forgiveness.
  • Maximum MSNLF Loan Amount: The permitted principal amount of an MSNLF loan will be the lesser of (a) $25 million, and (b) an amount that, when added to the borrower’s existing outstanding committed but undrawn bank debt, does not exceed four times its 2019 EBITDA. 
  • Maximum MSELF Loan Amount: The permitted principal amount of an MSELF loan will be the lesser of (a) $150 million, (b) 30% of the borrower’s existing outstanding committed but undrawn bank debt, and (c) an amount that, when added to the borrower’s existing outstanding and committed but undrawn bank debt, does not exceed six times its 2019 EBITDA. 
  • Transaction Fees: A borrower must pay the lender an origination fee of 100 basis points in connection with an MSL loan. An eligible lender under the MSNLF must pay the Federal Reserve’s MSL facility a facility fee of 100 basis points, and the lender is permitted to pass this fee on to the borrower (in addition to the 100 basis point origination fee the borrower is already required to pay).
Restrictions on Borrowers:
  • Existing Debt Restrictions: Borrowers cannot use the proceeds of an MSL loan to pay down other indebtedness to the MSL issuing lender or to cancel or reduce any existing lines of credit with the MSL issuing lender, and they cannot use the proceeds to repay other debt of equal or lower priority (other than mandatory payments of principal) until the MSL loan has been repaid in full.
  • Restrictions on Stock Buy-Backs and Dividends: The MSL incorporates restrictions on stock buy-backs and dividends set forth in the CARES Act for the $454 billion pool of loans for “other than small businesses,” which means that for the term of the MSL loan and for a period of one year thereafter, (a) neither the borrower nor any parent company (or, in specified industries, an “affiliate”) will make purchases of publicly traded securities, and (b) the borrower will not pay any dividends or make any distributions with respect to common stock. We note that these restrictions were drafted with public companies in mind and it is unclear how they will be applied to private companies or whether they will be broadly construed to limit distributions on other types of equity beyond common stock.
  • Compensation Restrictions: The MSL also incorporates limitations on compensation practices described in the CARES Act, which include restrictions for compensating two types of employees: those with more than $425,000 in total compensation (including bonuses, equity awards and other financial benefits) in 2019, and those with more than $3 million in total compensation in 2019.
    • Over $425,000 in 2019: Officers or employees cannot receive an increase in their annual total compensation during the term of the MSL loan and for one year thereafter. Further, they cannot receive severance benefits during that period in an amount greater than twice what they were entitled to in 2019.
    • Over $3 million in 2019: During the term of the MSL loan and for one year thereafter, the annual total compensation for these officers or employees will be limited to the sum of (a) $3 million, plus (b) 50% of the amount in excess of $3 million received in 2019.
  • Participation in Only One Federal Program: Borrowers participating in an MSL facility may not participate in the Primary Market Corporate Credit Facility of the Federal Reserve. In addition, a borrower cannot participate in both the MSNLF and the MSELF – borrowers must elect one or the other. However, a borrower that has taken advantage of the PPP may also take out loans under the MSL.
Interaction with other than Small Business Relief:

Title IV of the CARES Act establishes a program for providing relief to “other than small businesses” by authorizing the Department of the Treasury to make or guarantee loans in an aggregate amount of $500 billion, with $25 billion allocated to passenger airlines and related businesses, $4 billion allocated to cargo airlines and related businesses, $17 billion allocated to businesses critical to maintaining national security, and the remaining $454 billion allocated for unspecified businesses. Because Section 4003 of the CARES Act contemplates establishment of a program for providing loans to middle market companies, like the MSL, there is lots of confusion about the two programs. The MSL is the program referred to in Section 4003(c)(3)(D)(ii) of the CARES Act, while the “other than small business relief” is generally described in other parts of Section 4003 of the CARES Act. The MSL has borrowed some of the provisions and restrictions applicable to the “other than small business relief” program referenced in Section 4003 of the CARES Act. It is unclear whether other aspects of Section 4003 will also be made applicable to the MSL. For example, so far there is no indication that the receipt of an MSL loan will require a borrower to remain neutral on union organizing efforts, or to pledge not to outsource or offshore jobs. We will continue to monitor the development of the MSL to see if these or similar additional restrictions are incorporated into the MSL.

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