The Federal Reserve and Department of Treasury published additional details regarding two new loan programs that provide up to $600 billion for small- and mid-sized businesses: the Main Street New Loan Facility (MSNLF), which authorizes new loans to eligible borrowers, and the Main Street Expanded Loan Facility (MSELF), which increases the size of existing loans for eligible borrowers. The Main Street programs were previously announced in a press release on March 23, 2020, and the Federal Reserve published two terms sheets (MSNLF and MSELF) on April 9, 2020 that outline the terms and conditions of the programs, including borrower eligibility.

Applications are not yet being accepted for the Main Street programs, which will eventually be accepted through participating banks rather than through the government. Like the Small Business Administration’s (SBA) Payment Protection Program (PPP), borrowers will apply for the Main Street programs through banks that qualify as eligible lenders under the programs. We expect that additional guidance will be issued by the Federal Reserve and participating lenders in coming days and weeks.

Are technology and life sciences companies eligible for these loans?

Unfortunately, most technology and life sciences companies will not qualify for the Main Street programs. While the Main Street loan facilities provide a potential alternative source of capital for technology and life science companies who do not qualify for a PPP loan because they have (or are deemed to have based on the SBA’s “affiliation” rules) more than 500 employees, as described in greater detail below, the maximum loan size under both facilities is based on a formula that factors in a company’s earnings before interest, taxes, depreciation and amortization (EBITDA) for 2019. As currently stated, this formula does not allow for additional adjustments to EBITDA, including the exclusion of various non-cash or non-recurring charges, such as stock-based compensation, which technology companies often do when reporting their metrics. Moreover, the formula factors in a company’s existing outstanding but undrawn debt. Because most private and newly public technology and life sciences companies are not EBITDA positive and many also have outstanding indebtedness, this formula is particularly problematic for these companies and would cause most of them not to qualify for a loan under the programs.

What are the eligibility requirements to participate in the Main Street programs?

  • Borrowers must be impacted by COVID-19. Borrowers must attest that they require financing due to the exigent circumstances presented by the COVID-19 pandemic and that, using the proceeds of the Main Street loans, they will “make reasonable efforts” to maintain payroll and retain employees during the four-year term of the loan.
  • Borrowers must be U.S. businesses with significant U.S. operations. Borrowers must also be businesses that are created or organized in, or under the laws of, the United States, with significant operations in and with a majority of employees based in the United States.
  • Headcount and Revenue. Borrowers may have up to 10,000 employees OR up to $2.5 billion in 2019 annual revenues.

Note: There was previously some discussion that the Main Street programs would not be available for companies with fewer than 500 employees, but the term sheets do not specify a minimum headcount for participating borrowers, and the April 9 press release notes that firms who have taken advantage of the PPP may also take out Main Street loans. Accordingly, companies with fewer than 500 employees are also eligible for the Main Street loans assuming they meet the other requirements.

Note: In contrast to the PPP, the term sheets released by the Federal Reserve so far do not provide any guidance as to whether the SBA’s “affiliation” rules also apply to the Main Street programs.

  • Other Attestation Requirements. Borrowers will be required to make a variety of additional attestations, including, with respect to uses of the loan proceeds, restrictions on cancellation and reduction of existing indebtedness; compliance with the EBITDA leverage condition; restrictions on compensation, share repurchases and capital distributions; and assurances that the loan does not implicate a conflict of interest under the Coronavirus Aid, Relief and Economic Security Act (CARES Act).

Can borrowers participate in multiple programs financed by the Federal Reserve and the CARES Act?

Borrowers may only participate in one of the Main Street programs, and borrowers who participate in either Main Street program are ineligible for participation in the Federal Reserve’s Primary Market Corporate Credit Facility (a facility to support credit to large employers through new bond and loan issuances).

Borrowers who previously obtained a PPP loan can still take advantage of the Main Street programs.

What are the terms of the Main Street loan facilities?

MSNLF

MSELF

Origination

On or after April 8, 2020

Before April 8, 2020, and subsequently upsized

Term

4-year maturity on the new loan

4-year maturity on the upsized tranche of existing loans

Security

Unsecured

Collateral securing the existing loan (if any) will secure the upsized tranche on a pro rata basis

Amortization of Principal & Interest

Deferred for 1 year

Deferred for 1 year

Interest Rate

Adjustable rate of secured overnight financing rate
(SOFR) + 250-400 basis points

Adjustable rate of SOFR +
250-400 basis points

Prepayment Penalties

No prepayment penalties

No prepayment penalties

Minimum Loan Size

$1 million

$1 million

Maximum Loan Size

Lesser of:
(i) $25 million; or
(ii) an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed FOUR times the borrower’s 2019 EBITDA

Lesser of:
(i) $150 million,
(ii) 30% of the borrower’s existing outstanding and committed but undrawn bank debt; or
(iii) an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed SIX times borrower’s 2019 EBITDA

Borrowers will also pay lenders an origination fee of 100 basis points of the principal amount of the new loan or upsized tranche of the existing loan received under the applicable Main Street program.

Are there any restrictions associated with the Main Street loans?

Yes. The Main Street loans have the following restrictions:

Use of Proceeds. Borrowers cannot use proceeds of any loans received under the Main Street programs to repay other loan balances.

Repayment or Modification of Existing Indebtedness. Borrowers must commit to refrain from repaying other debt of equal or lower priority, with the exception of mandatory principal payments, unless the Main Street loan is paid off in full. Borrowers also must not cancel or reduce any existing outstanding lines of credit with the Main Street loan program lender or other lenders.

Compensation, Stock Repurchases and Dividends. Borrowers must follow the compensation, stock repurchase and capital stock distribution restrictions that apply to direct loan programs under the CARES Act. This means that until 12 months after the date on which the Main Street loan is no longer outstanding:

  • Borrowers who are public companies cannot repurchase stock listed on a stock exchange, except to the extent required under a contractual obligation in effect as of March 27, 2020;
  • Borrowers cannot pay dividends or make other capital distributions with respect to the common stock; and
  • Borrowers are subject to the following restrictions on compensation:
    • Other than employees whose compensation is determined through an existing collective bargaining agreement entered into prior to March 1, 2020, for officers or employees of the borrower whose compensation exceeded $425,000 in 2019, such employees:
      • May not receive, during any 12 consecutive months, total compensation which exceeds the total compensation received in 2019; and
      • May not receive severance or benefits upon termination which exceeds twice the total compensation received in 2019; and
    • For employees of the borrower whose total compensation exceeded $3 million in 2019, such employees may not receive during any 12 consecutive months, total compensation in excess of the sum of (1) $3 million and (2) 50% of the excess over $3 million received by the employee in 2019.

Total compensation is defined to include salary, bonuses, awards of stock and other financial benefits provided by the business to an officer or employee.

It is not clear whether the restrictions on dividends or other capital distributions, and on public company stock repurchases, would also be applied to restrict private company stock repurchases, or loans to stockholders or other affiliates, or acquisitions or investments. However, a use of the loan proceeds for these purposes would likely be viewed as inconsistent with the required attestation that the financing is required due to the exigent circumstances presented by the COVID-19 pandemic and that the company will “make reasonable efforts” to use the proceeds of the loan to maintain payroll and retain employees during the four-year term of the loan.

Note: The CARES Act includes additional restrictions on businesses receiving direct loans, such as requirements that the borrower use the funds to retain at least 90% of its workforce, at full compensation and benefits, until September 30, 2020, and restrictions on outsourcing or offshoring jobs for the term of the loan and two years after complete repayment of the loan. However, these additional restrictions do not appear to apply to borrowers under the Main Street programs.

How do borrowers prepare to apply?

Applications have not opened yet, and potential borrowers should be aware that the fact sheets released by the Federal Reserve explicitly state that the Federal Reserve or Treasury may make adjustments to the terms and conditions of the Main Street programs.

While companies wait for additional guidance from the Federal Reserve and participating lenders, potential borrowers can begin gathering materials likely required for the application process, which might include payroll records to support the borrower’s salary information and employee headcount and financial statements to support the borrower’s EBIDTA in 2019.

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