The Board of Governors of the Federal Reserve System has announced that it is establishing a Main Street Lending Program (collectively, the “Program”) to support lending to small and medium-sized businesses that were in sound financial condition before the onset of the COVID-19 pandemic.

The Program will operate through three (3) facilities: the Main Street New Loan Facility (“MSNLF”), the Main Street Priority Loan Facility (“MSPLF”), and the Main Street Expanded Loan Facility (“MSELF”). Term sheets for each facility and Frequently Asked Questions (“FAQs”) providing more information regarding eligibility and conditions can be found in the links set forth below.

Structure of Programs

To implement the Program, the Federal Reserve Bank of Boston will set up a special purpose vehicle (“SPV”) to purchase participations in loans originated by eligible lenders. Lenders will retain a percentage of the loans. As detailed further in the term sheets, U.S. businesses may be “Eligible Borrowers” for loans if they meet certain conditions as set forth in the term sheets including either of the following two (2) conditions: (1) the business has 15,000 employees or fewer; or (2) the business had 2019 revenues of $5 billion or less. Loans issued under the Program would have a four-year maturity, and principal and interest payments on the loans will be deferred for one year. Eligible lenders may originate new loans (under MSNLF and MSPLF) or increase the size of (or “upsize”) existing loans (under MSELF) made to Eligible Borrowers

Visit the Federal Reserve’s April 30 announcement about expansion of the program for helpful resources in understanding the program, including term sheets. You can also visit the Fed’s Main Street Lending Program FAQ. For more information on participation requirements for lenders and certified development companies, click here.

Certifications and Covenants

Question and answer H.1 in the Main Street Lending Program FAQ outlines the various certifications and covenants under the Program.  While most of the certifications and covenants among the three loan facilities under the Program are the same, there are two variations. The Eligible Lender certification relating to EBITDA (i.e. earnings before interest, taxes depreciation and amortization) is different in the MSELF than it is in the MSNLF and MSPLF, owing to fact that the MSELF necessarily includes an existing loan from the Eligible Lender.  In addition, the MSPLF includes a modification to the Eligible Borrower covenant regarding debt repayment to allow an Eligible Borrower to refinance existing debt owed to a lender that is not the Eligible Lender at the time the MSPLF Loan is originated.

Eligible Lenders

An Eligible Lender is a U.S. federally insured depository institution (including a bank, savings association, or credit union), a U.S. branch or agency of a foreign bank, a U.S. bank holding company, a U.S. savings and loan holding company, a U.S. intermediate holding company of a foreign banking organization, or a U.S. subsidiary of any of the foregoing.

Eligible Loans

An Eligible Loan is a secured or unsecured term loan made by an Eligible Lender(s) to an Eligible Borrower that was originated after April 24, 2020, provided that the loan has all of the following features:

1. Four (4) year maturity;
2. Principal and interest payments deferred for one (1) year (unpaid interest will be capitalized);
3. Adjustable rate of LIBOR (1 or 3 month) + 300 basis points;
4. Principal amortization of one-third at the end of the second year, one-third at the end of the third year, and one-third at maturity at the end of the fourth year;
5. Minimum loan size of $500,000;
6. Maximum loan size that is the lesser of (i) $25 million or (ii) an amount that, when added to the Eligible Borrower’s existing outstanding and undrawn available debt, does not exceed four (4) times the Eligible Borrower’s adjusted 2019 earnings before interest, taxes, depreciation, and amortization (“EBITDA”);
7. Is not, at the time of origination or at any time during the term of the Eligible Loan, contractually subordinated in terms of priority to any of the Eligible Borrower’s other loans or debt instruments; and
8. Pre-payment permitted without penalty.

The Main Street Lending Program is part of the federal government’s economic stimulus response to the COVID-19 pandemic. For information on other programs or legal issues arising from the pandemic, visit our COVID-19 resource page.

This alert does not purport to be a substitute for advice of counsel on specific matters.

Harris Beach has offices throughout New York State, including Albany, Buffalo, Ithaca, New York City, Rochester, Saratoga Springs, Syracuse, Uniondale and White Plains, as well as New Haven, Connecticut and Newark, New Jersey.