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The Main Street Lending Program: A Potential Financing Option Intended for Small and Mid-Sized Companies

Corporate
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On Thursday, April 9, 2020, the Treasury and the Federal Reserve announced the details of a Main Street Lending Program authorized by the CARES Act to help small and mid-sized businesses obtain funding of up to $600 billion. The program establishes two potential lending facilities – an up to $25 million unsecured facility for new loans originated on or after April 8, 2020, and an extension facility of up to $150 million for loans in existence as of April 8, 2020. Term sheets for both programs can be found here (for the new facility) and here (for the extension facility).

The Main Street Lending Program is open to businesses with up to 10,000 employees or up to $2.5 billion in annual 2019 revenues, which are created or organized in the U.S. with significant operations and employees located in the U.S.

Currently, no guidance has been released as to whether affiliation rules apply or how employees or revenue caps will be determined.

Both Main Street Lending Program facilities have the following terms:

  1. 4-year maturity
  2. Principal and interest payments deferred for one year
  3. Adjustable rate of SOFR plus 2.50% to 4.00%
  4. Minimum loan size of $1 million
  5. Maximum loan size of—
    1. The lesser of (i) $25 million or (ii) a leverage amount no greater than 4x EBITA for the new facility, and
    2. The lesser of (i) $150 million, (ii) 30% of an existing undrawn amount or (iii) a leverage amount of no greater than 6x EBITDA for the extended facility
  6. No prepayment penalty, although loan origination/upsizing, servicing and/or facility fees will apply in each case

Unlike the SBA’s payroll loans, the amounts loaned under the Main Street Lending Program are not currently planned to be forgivable, although in the case of the new facility, they are unsecured. Other terms of the loans also remain unknown, while more information is likely to be made available. However, based on the terms provided by the Federal Reserve on the Main Street Lending Program, and based on guidance in the CARES Act, we do know that, among other things, the following are likely to also apply:

  1. Loan proceeds will be unavailable for repayment or refinancing of any other existing debt with the lender or to repay any debt that is pari or subordinate (with the exception of mandatory principal payments).
  2. The borrower will be required to certify that it will require the financing due to the exigent circumstances presented by the COVID-19 pandemic, and the loan proceeds will be used to maintain payroll and retain workers during its term.
  3. The borrower will be required to comply with compensation caps for certain executives or employees, restrictions on stock repurchases, and restrictions on dividend payments.
  4. The borrower will be required to certify that no conflicts of interest exist under Section 4019(b) of the CARES Act.

Based on the guidance provided to date, it appears that the Main Street Lending Program will be available until September 30, 2020. Based on public statements recently made by the Federal Reserve, the Main Street Lending Program should be operational within the coming two to three weeks.

As noted above, the Main Street Lending Program differs in substantial respects from the Small Business Administration payroll protection program (or “PPP”), even though both programs (as well as other federal lending programs) were specifically authorized under the CARES Act. We anticipate as well that additional information on the SBA’s PPP, in addition to other federal programs authorized under the CARES Act, will likely become available in the coming weeks. We are following these programs and updates carefully to provide guidance to our clients. Our corporate and finance teams are available to assist companies in analyzing and assessing financing options, as well as working with existing facilities and lenders to determine next steps as necessary. Our teams stand ready and available to assist all companies with these decisions.

Authors:
William F. Capps, Chairman, Corporate Department
Marianne Martin, Partner, Corporate Department
Jay T. Thompson, Partner, Corporate Department
Vanessa Han, Associate, Corporate Department

Jeffer Mangels Butler & Mitchell LLP is a full-service law firm committed to providing clients with outstanding results. Our corporate lawyers serve numerous middle-market companies, large publicly traded corporations and emerging entrepreneurial businesses with a full range of financing, transactional and operational counsel, as well as in all aspects of mergers and acquisitions.