This article was updated on May 8, 2020. Updates to this article will be made as new information becomes available. This post is the second of two posts about the Main Street Lending Program FAQs
Schneider Downs continues to track the evolving landscape of financial programs offered to small businesses disrupted by the coronavirus crisis (COVID-19). This is an overview and list of frequently asked questions (“FAQs”) regarding the Main Street Lending Program (Main Street or Program), as provided by the Board of Governors of the Federal Reserve System (Federal Reserve) on their website. For additional information on Main Street, see our article on May 1, 2020; Expansion of Main Street Lending Program.
The Federal Reserve provided 19 pages of FAQs related to Main Street. We have highlighted and summarized the following other important points regarding the purpose and design of the Main Street loans, the Main Street application process and the terms and conditions of the Main Street loans:
Purpose and Design
Are loans that are originated or upsized in connection with the Program forgivable?
No. Main Street loans are full-recourse loans and are not forgivable. The principal amount of a Main Street loan cannot be reduced through loan forgiveness.
How long will the Program be in effect?
The Program is authorized to purchase participations in MSNLF Loans, MSPLF Loans, and MSELF Upsized Tranches until September 30, 2020.
MSNLF, MSPLF and MSELF Loans
How does the MSNLF or MSPLF work?
The borrower must have been in sound financial condition prior to the onset of the COVID-19 pandemic. In order for a borrower to receive either of these loans, any existing loan that the borrower had outstanding with the lender as of December 31, 2019, must have had an internal risk rating (based on the lender’s risk rating system) that was equivalent to a “pass” in the Federal Financial Institutions Examination Council’s (FFIEC) supervisory rating system as of that date.
How does the MSELF work?
To be eligible for “upsizing,” the existing term loan or revolving credit facility must have been originated on or before April 24, 2020, and must have a remaining maturity of at least 18 months. The lender may extend the maturity of an existing loan or revolving credit facility at the time of upsizing in order for the underlying instrument to satisfy the 18-month remaining maturity requirement.
The borrower must have been in sound financial condition prior to the onset of the COVID-19 pandemic. The existing loan or revolving credit facility must have had a risk rating, based on the lender’s internal rating system, equivalent to a “pass” in the FFIEC’s supervisory rating system as of December 31, 2019.
How can I apply for a Program loan?
To obtain a loan under the Program, an Eligible Borrower must submit an application and any other documentation required by an Eligible Lender. Borrowers should contact an Eligible Lender for more information on whether the lender plans to participate in the Program and to request more information on the application process.
Updates regarding the Program, including the official launch date and the time will be made available on the Board’s Main Street page
Is a Business eligible to borrow if it receives a PPP loan?
A Business that receives a loan through the SBA’s PPP can be an Eligible Borrower under Main Street if it meets the Eligible Borrower criteria.
Do Eligible Borrowers qualify automatically for a loan under the Program?
No. The term sheet contains minimum requirements for the Program. Eligible Lenders are expected to conduct an assessment of each potential borrower’s financial condition at the time of the potential borrower’s application. Lenders will apply their own underwriting standards in evaluating the financial condition and creditworthiness of a potential borrower. A lender may require additional information and documentation in making this evaluation and will ultimately determine whether a borrower is approved for a Program loan in light of these considerations. Businesses that otherwise meet the Eligible Borrower requirements may not be approved for a loan or may not receive the maximum allowable amount.
Terms and Conditions
How will adjusted 2019 EBITDA be calculated?
For MSNLF and MSPLF, the methodology used by the lender to calculate adjusted 2019 EBITDA for a borrower must be a methodology it previously used for adjusting EBITDA when extending credit to the borrower or to similarly situated borrowers on or before April 24, 2020.
For MSELF Eligible Loans, the methodology used by the lender to calculate adjusted 2019 EBITDA for the borrower must be the methodology it previously used for adjusting EBITDA when originating or amending the underlying loan on or before April 24, 2020.
How will “existing outstanding and undrawn available debt” be calculated?
“Existing outstanding and undrawn available debt” includes all amounts borrowed under any loan facility, including unsecured or secured loans from any bank, non-bank financial institution, or private lender, as well as any publicly issued bonds or private placement facilities. It also includes all unused commitments under any loan facility, excluding (1) any undrawn commitment that serves as a backup line for commercial paper issuance, (2) any undrawn commitment that is used to finance receivables (including seasonal financing of inventory), (3) any undrawn commitment that cannot be drawn without additional collateral, (4) any undrawn commitment that is no longer available due to change in circumstance. Existing outstanding and undrawn available debt should be calculated as of the date of the loan application.
When do I need to start paying interest on my loan?
No payments of principal or interest will be required during the first 12 months of the loan. Principal and interest payments for all loans obtained under the Program are deferred for one year. Unpaid interest will be capitalized.
How will principal be amortized after the first year?
MSNLF: No principal is paid in the first year. The loan will be amortized over the remaining term of the loan, with one-third of principal due at the end of each of years 2 and 3, and one-third due at maturity at the end of year 4.
MSPLF and MSELF: No principal is paid in the first year. The loan will be amortized over the remaining term of the loan, with 15% of principal due at the end of year 2, 15% of principal due at the end of year 3, and a balloon payment of 70% of principal due at maturity at the end of year 4.
For purposes of this question, principal includes capitalized interest. Eligible Lenders will provide Eligible Borrowers with payment information during the Program loan origination process.
Is collateral required for Main Street loans?
MSNLF Loans, MSPLF Loans, and MSELF Upsized Tranches may be secured or unsecured. An MSELF Upsized Tranche must be secured if the underlying loan is secured.
Are there fees associated with Main Street loans?
Yes, there are fees associated with the MSNLF, MSPLF, and MSELF.
MSNLF and MSPLF: Lenders will pay a transaction fee of 100 basis points of the principal amount of the MSNLF or MSPLF Loan at the time of origination, and may pass on this fee to borrowers. In addition, the borrower will pay the lender a fee of up to 100 basis points of the principal amount of the MSNLF or MSPLF Loan at the time of origination.
MSELF: Lenders will pay a transaction fee of 75 basis points of the principal amount of the MSELF Upsized Tranche at the time of upsizing, and may choose to pass on this fee to borrowers. In addition, the borrower will pay a lender a fee of up to 75 basis points of the principal amount of the MSELF Upsized Tranche at the time of upsizing.
What constitutes “commercially reasonable efforts” to maintain payroll and retain employees?
Borrowers should make commercially reasonable efforts to retain employees during the term of the Program Loans. Specifically, a borrower should undertake good-faith efforts to maintain payroll and retain employees, in light of its capacities, the economic environment, its available resources, and the business need for labor. Borrowers that have already laid-off or furloughed workers as a result of the disruptions from COVID-19 are eligible to apply for Main Street loans.
Can an Eligible Borrower receive more than one Main Street loan?
A borrower may only participate in one of the Main Street facilities. However, a borrower may receive more than one loan under a single Main Street facility, provided that the sum of MSNLF Loans or MSPLF Loans received by a single borrower cannot exceed $25 million; and the sum of MSELF Upsized Tranches received by a single borrower cannot exceed $200 million.
The Main Street Lending Program has not launched yet. If you have other questions regarding the Main Street program, first reach out to your bank and other lenders about whether you can apply for Main Street funding through these institutions. If you need more information, please reach out to any of your contacts at Schneider Downs or contact Joel Rosenthal ([email protected]).
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.