by Jason MacMorran, Brandon Lagarde 

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Last updated on 4/13/2020

On April 9, 2020, the Federal Reserve (Fed) announced details of new lending programs intended to facilitate lending by eligible banks, which may help provide funds to small and medium-sized businesses impacted by the coronavirus pandemic. Through these programs, the central bank plans to make $600 billion in loans available through two different emergency-lending facilities: Main Street New Loan Facility (MSNLF) and Main Street Expanded Loan Facility (MSELF). Through both facilities, eligible banks will sell 95% of their loans to the Fed, keeping a 5% stake to have some “skin in the game.”

The following chart summarizes recently-released information on these two facilities and other applicable requirements set forth in the CARES Act.Main Street Expanded Loan Facility​

In addition to these loan facility terms and conditions, the following requirements are also noted under both MSELF and MSNLF loan facilities:

• Until 12 months after the loan is repaid, the borrower may not pay dividends or distributions (Section 4003 of the CARES Act).
• Until 12 months after the loan is repaid, the borrower may not repurchase equity securities of the borrower or its parent listed on a national securities exchange (Section 4003 of the CARES Act).
• Until 12 months after the loan is repaid, the borrower is required to comply with compensation limitations in Section 4004 of the CARES Act, including:
  • No officer or employee whose 2019 compensation exceeded $425,000 (with some exceptions for collective bargaining agreements) may receive total compensation during any consecutive 12-month period that exceeds their 2019 compensation (or severance pay that exceeds 2x their 2019 compensation)
  • No officer or employee whose 2019 compensation exceeded $3 million may receive total compensation during any consecutive 12-month period that exceeds the sum of $3 million and 50% of the excess of their 2019 compensation over $3 million.
• The lender must attest that the proceeds will not be used to repay or refinance pre-existing loans or lines of credit to the borrower.
• The lender must attest that it will not cancel or reduce any existing lines of credit to the borrower.
• The borrower must attest that it will not seek to cancel or reduce any outstanding lines of credit with any existing lender.
• Until the eligible loan is repaid, the borrower must attest that it will refrain from using the proceeds to repay other loan balances and repay other debt of equal or lower priority, except mandatory scheduled principal and interest payments.
• The borrower must attest that it requires financing due to COVID-19 and that reasonable efforts will be made to use eligible loan proceeds to maintain its payroll and retain employees during the term of the loan.
• The borrower must attest that it will meet the EBITDA leverage requirements above.
• The borrower must attest that it will follow the compensation and stock repurchase requirements above.
• The borrower and lender must certify that they are eligible to participate in the facility, including no conflicts of interest under Section 4019 of the CARES Act (applicable to certain government officials and members of Congress).

Consistent with the theme of other recently enacted COVID-19 related stimulus programs, there are many items that remain unclear with regard to the Main Street facilities. Specifically, Section 4003 of the CARES Act contains a variety of other requirements and conditions related to loans to mid-size businesses that were not addressed in the Fed term sheets outlined above. Some of these provisions are summarized below.

• The proceeds will be used to retain at least 90% of the borrower’s workforce at full compensation and benefits through September 30, 2020.
• The borrower intends to restore at least 90% of the workforce that existed as of February 1, 2020 and restore all compensation and benefits to workers no later than 4 months after the termination of the public health emergency declared on January 31, 2020.
• The borrower is not a debtor in a bankruptcy proceeding.
• The borrower will not outsource or offshore jobs for the term of the loan and for two years after the loan is repaid.

Over the past several weeks, businesses have been faced with a multitude of challenges, and these lending programs are designed to provide relief to small and mid-sized businesses. It should be noted that borrowers under the Paycheck Protection Program (PPP) are also eligible to participate in the Main Street Loans above. Small businesses, however, may decide the Main Street loans are not attractive solutions due to the minimum loan amount ($1 million), higher interest rates, longer terms, financial covenants, and the fact that the Main Street loans will not be forgiven. While additional credit can provide much-needed relief as businesses owners are trying to survive and maintain their workforce, businesses should be mindful of future debt service payments and other requirements as part of their decision process.

Help Is Available

The COVID-19 pandemic has created a constantly-changing situation for businesses of every size and industry. As future legislation is developed, deadlines are updated, and additional challenges and opportunities are uncovered, P&N’s dedicated professionals are committed to understanding and applying this information to help our clients.

Please keep in mind that due to the quickly-changing nature of the COVID-19 pandemic, you should always discuss changes with your P&N advisor or legal counsel. If your organization needs assistance implementing or adjusting your business continuity plan, please contact us.