On April 30, the Federal Reserve announced long-awaited details to the Main Street lending programs. There are significant updates to the original Term Sheet announced on April 9.
The Announcement
There are now three programs available to borrowers, and GHJ highlights the two newly announced programs below.
| Features | New Loans Program | Priority Loans Program |
|---|---|---|
| Size of Facility | Minimum: $500,000 Maximum: the lesser of $25 million or 4x Adjusted 2019 EBITDA less Existing Credit Facilities | Minimum: $500,000 Maximum: the lesser of $25 million or 6x Adjusted 2019 EBITDA less Existing Credit Facilities |
| Interest Rate | LIBOR+3 percent | LIBOR+3 percent |
| Term/Repayment Schedule | Four-year term with a one-year principal and interest holiday. Thereafter, 1/3 at the end of year two, 1/3 at the end of year three and 1/3 at the end of year four | Four-year term with a one-year principal and interest holiday. Thereafter, 15 percent at the end of year two, 15 percent at the end of year three and 70 percent at the end of year four |
| Collateral | May or may not be required | May or may not be required |
| Can Existing Credit Facilities be Repaid? | No, except for already established repayment schedules, refinancing of maturing facilities or repayments under lines of credit. |
|
| Seniority | May not be contractually subordinated in priority with other borrower loans | Senior or pari passu in priority or in security with other borrower loans (except mortgage debt) |
| Additional Debt Facilities Allowed? |
| Equipment or Inventory lines may be taken on if the line is secured by such assets, but meets priority requirements |
| Lender Retention | 5 percent of the loan | 15 percent of the loan |
Additional Highlights:
- The total facility established by the Federal Reserve among all three programs is $600 billion, although it reserves the right to increase in the future
- The launch date of the program is to be announced and the program will sunset on Sept. 30
- Borrowers may participate in only one of the Main Street programs, but may have multiple loans under that program
- PPP borrowers are eligible to participate in the Main Street programs
- There will be a full underwriting process conducted by lenders
- Importantly, this process will be conducted on the applicant’s financial condition at the time of application
- Calculation of Adjusted 2019 EBITDA will be lender specific and consistent with past practices prior to April 24
- Eligible lenders are U.S. federally insured depository institutions, U.S. branches of foreign banks, U.S. bank holding companies or intermediate holding companies of foreign banks. Non-bank institutions are not eligible, but that may change
- Eligibility will be for businesses with a maximum of 15,000 employees or $5 billion in 2019 revenues and have principal operations in and a majority of its employees in the U.S. Additionally, it must also not be an ineligible business as outlined in the CARES Act PPP requirements. Finally, it must be a business established prior to March 1.
- Nonprofit enterprises are not currently eligible but may become eligible at a later date
- There are significant restrictions on dividends, compensation, employment practices and distributions during the term of the loan and, for certain compensation restrictions, for a period of time after the term is over
- Importantly, tax distributions for S-Corporations or other pass-through entities will be allowed
- Fees:
- 100bp by the borrower to the lender for origination and servicing
- 100bp by the lender to the Federal Reserve, which may be passed on to the borrower
- There are no prepayment penalties
- Borrowers must certify that they do not anticipate filing for protection under bankruptcy for a 90-day period following funding
- There are no outlined use of proceeds, but borrowers must make commercially reasonable efforts to retain employees during the loan term
GHJ Observations and Guidance
These are very exciting programs, particularly for those borrowers that are reconsidering participation in the PPP programs or need additional liquidity to operate.
The programs are designed especially for companies that have experienced significant business deterioration during the COVID-19 pandemic. They provide significant liquidity under favorable pricing and repayment terms to those businesses that anticipate a return to more normal operations (over a short or extended period of time) once stay-at-home orders are reduced or eliminated and customer behavior is then assessed.
Other observations:
- The reduction of the minimum loan size makes the programs available to many more applicants
- GHJ urges rapid consideration of these programs as the applicant pool will be for significantly larger and more sophisticated companies than for PPP loans. It is not difficult to imagine a sellout of the programs established by the Federal Reserve in a relatively short period of time.
- Borrowers should shop around among lenders for the most expansive Adjusted EBITDA calculations and needs for collateral
- GHJ will be reaching out to lenders to learn more about their participation and requirements
- Participation in the Priority Program (but not the New Loan Program) would allow a borrower to retire lines of credit or facilities at their current lender if they go to a new lender for Priority Program funds
- The collateral and seniority terms may create the need for intercreditor agreement negotiations between and among existing lenders, if different than the Main Street lender
Please reach out to GHJ’s COVID-19 Resource Team if you have any questions specific to your businesses on the above, PPP loans, CARES Act or any other COVID-19-related legislation or issues.
