This article was updated on May 7, 2020. Updates to this article will be made as new information becomes available. This post is the first of two.
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 www.federalreserve.gov. 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 critical points regarding the purpose and design of the Main Street loans, borrower eligibility and certifications and covenants:
Purpose and Design
What are the differences between the Main Street New Loan Facility (MSNLF), the Main Street Priority Loan Facility (MSPLF), and the Main Street Expanded Loan Facility (MSELF)?
Main Street includes three facilities, and all facilities use the same lender and borrower criteria, and have many of the same features, including the same maturity, interest rate, deferral of principal and interest for one year, and ability of the borrower to prepay without penalty.
The MSPLF was added to the Program, with newly originated term loans, which are based on 6x adjusted 2019 EBITDA (i.e., looser terms than MSNLF).
Other features of the loans extended in connection with each facility differ. The loan types also differ in how they interact with the borrower’s existing outstanding debt, including with respect to the level of pre-crisis indebtedness a borrower may have incurred.
MSNLF: Lenders extend new loans to borrowers ranging in size from $500,000 to $25 million. The maximum size of a loan made in connection with the MSNLF cannot, when added to the borrower’s existing outstanding and undrawn available debt, exceed 4x the borrower’s adjusted 2019 EBITDA.
MSPLF: Lenders extend new loans to borrowers ranging in size from $500,000 to $25 million. The maximum size of a loan made in connection with the MSPLF cannot, when added to the borrower’s existing outstanding and undrawn available debt, exceed 6x the borrower’s adjusted 2019 EBITDA.
MSELF: Lenders increase (or “upsize”) a borrower’s existing term loan or revolving credit facility. The upsized tranche is a four-year term loan ranging in size from $10 million to $200 million. The maximum size of a loan made in connection with the MSELF cannot exceed (i) 35% of the borrower’s existing outstanding and undrawn available debt that is pari passu in priority with the loan and equivalent in secured status (i.e., secured or unsecured); or (ii) when added to the borrower’s existing outstanding and undrawn available debt, 6x the borrower’s adjusted 2019 EBITDA.
Which entities are eligible to borrow under the Program?
To be eligible to borrow under the Program, a Business must satisfy certain eligibility criteria, as set out in the MSNLF, MSPLF, and MSELF term sheets and described further below. The Eligible Borrower criteria are the same across all three facilities.
The Business must have been established prior to March 13, 2020.
The Business must not be an Ineligible Business. Ineligible Businesses include Businesses modified and clarified by SBA regulations for purposes of the Paycheck Protection Program (PPP) on or before April 24, 2020
The Business must meet at least one of the following two conditions: (a) the Business has 15,000 employees or fewer, or (b) the Business has 2019 annual revenues of $5 billion or less. Businesses must meet at least one of these conditions, but are not required to meet both. To determine how many employees a Business has or a Business’s 2019 revenues, the employees and revenues of the Business must be aggregated with the employees and revenues of its affiliated entities.
The Business must be a U.S. Business. Borrowers must be Businesses that were created or organized in the United States or under the laws of the United States with significant operations in and a majority of their employees based in the United States.
The Business may only participate in one of the Main Street facilities and must not also participate in the Primary Market Corporate Credit Facility (the “PMCCF” established by the Federal Reserve for large companies).
The Business must not have received specific support pursuant to the Coronavirus Economic Stabilization Act of 2020 (Subtitle A of Title IV of the CARES Act).
The Business must be able to make all of the certifications and covenants required under the Program. See the link to the term sheets below.
Borrowers that satisfy all criteria above may apply to an Eligible Lender for a Main Street loan. The lender is expected to conduct an assessment of each potential borrower’s financial condition to determine whether the loan is approved.
For the avoidance of doubt, a Business that has received PPP loans, or that has affiliates that have received PPP loans, is permitted to borrow under Main Street, provided that the Business is an Eligible Borrower.
How is “Business” defined?
Businesses must be legally formed entities that are organized for profit as: a partnership; a limited liability company; a corporation; an association; a trust; a cooperative; a joint venture with no more than 49% participation by foreign business entities; or a tribal business concern.
How should a Business count employees for purposes of determining eligibility under the Program?
To be an Eligible Borrower, a Business must meet at least one of the following two conditions: (a) the Business has 15,000 employees or fewer, or (b) the Business has 2019 annual revenues of $5 billion or less. To determine how many employees a Business has, it should follow the framework set out in the SBA’s regulation at 13 CFR 121.106. The Business should count as employees all full-time, part-time, seasonal, or otherwise employed persons, excluding volunteers and independent contractors. Businesses should count their own employees and those employed by their affiliates. In order to determine the applicable number of employees, Businesses should use the average of the total number of persons employed by the borrower and its affiliates for each pay period over the 12 months prior to the origination or upsizing of the Main Street loan.
How should a Business calculate 2019 revenues for purposes of determining eligibility under the Program?
To determine its 2019 annual revenues, a Business must aggregate their revenues with those of their affiliates. Businesses may use either of the following methods to calculate 2019 annual revenues for purposes of determining eligibility:
A Business may use its (and its affiliates’) annual “revenue” per its 2019 Generally Accepted Accounting Principles-based (GAAP) audited financial statements; or
A Business may use its (and its affiliates’) annual receipts for the fiscal year 2019, as reported to the Internal Revenue Service. For purposes of the Program, the term “receipts” has the same meaning used by the SBA in 13 CFR 121.104(a).
If a potential borrower (or its affiliate) does not yet have audited financial statements or annual receipts for 2019, the borrower (or its affiliate) should use its most recent audited financial statements or annual receipts.
Which entities are a Business’s affiliates for purposes of the employee and revenue eligibility criteria?
To determine eligibility, a Business’s employees and 2019 revenues are calculated by aggregating the employees and 2019 revenues of the Business itself with those of the Business’s affiliated entities in accordance with the affiliation test set forth in 13 CFR 121.301(f) (1/1/2019 ed.).
Are non-profit organizations eligible to borrow under the Program?
Non-profit organizations are not currently eligible under the Program. The Federal Reserve and the Treasury Department will be evaluating the feasibility of adjusting the borrower eligibility criteria and loan eligibility metrics of the Program for such organizations.
Certifications and Covenants
Are the required certifications and covenants under the three Main Street facilities the same?
While most of the certifications and covenants are the same, there are two variations. The Eligible Lender certification relating to EBITDA is different in the MSELF than it is in the MSNLF and MSPLF, owing to fact that the MSELF necessarily includes an existing loan from the Eligible Lender. In addition, the MSPLF includes a modification to the Eligible Borrower covenant regarding debt repayment to allow an Eligible Borrower to refinance existing debt owed to a lender that is not the Eligible Lender at the time the MSPLF Loan is originated.
What compensation, stock repurchase and capital distributions restrictions apply?
The compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act apply under each of the MSELF, MSNLF and MSPLF, except that, in each case, restrictions on dividends and other capital distributions will not apply to distributions made by an S corporation or other tax pass-through entity to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings.
What restrictions are placed on the Eligible Borrower’s ability to repay existing debt?
The restrictions on repaying debt vary across the various Main Street loans:
MSNLF and MSELF: The borrower must commit to refrain from repaying the principal balance of, or paying any interest on, any debt until the MSNLF Loan or the MSELF Upsized Tranche is repaid in full, unless the debt or interest payment is mandatory and due. The borrower must also commit that it will not seek to cancel or reduce any of its committed lines of credit with the Eligible Lender or any other lender.
MSPLF: The borrower must commit to refrain from repaying the principal balance of, or paying any interest on, any debt until the MSPLF Loan is repaid in full, unless the debt or interest payment is mandatory and due; however, the borrower may, at the time of origination of the MSPLF Loan, refinance existing debt owed by the borrower to a lender that is not the Eligible Lender. The borrower must also commit that it will not seek to cancel or reduce any of its committed lines of credit with the Eligible Lender or any other lender.
These covenants would not prohibit an Eligible Borrower from undertaking any of the following actions during the term of a Program Loan:
repaying a line of credit (including a credit card) in accordance with the Eligible Borrower’s normal course of business usage for such line of credit;
taking on and paying additional debt obligations required in the normal course of business and on standard terms, including inventory and equipment financing, provided that such debt is secured by newly acquired property (e.g., inventory or equipment), and, apart from such security, is of equal or lower priority than the MSNLF Loan, the MSPLF Loan, or the MSELF Upsized Tranche; or
refinancing maturing debt.
Is an Eligible Lender permitted to accept partial repayment of an Eligible Borrower’s existing line of credit with the Eligible Lender?
The Eligible Lender would not be prevented from accepting regularly scheduled, periodic repayments on a line of credit from an Eligible Borrower in accordance with the Eligible Borrower’s normal course of business usage for such line of credit.
What is the Eligible Lender’s role in verifying certifications and covenants?
An Eligible Lender is required to collect the required certifications and covenants from each Eligible Borrower at the time of origination or upsizing. Eligible Lenders may rely on an Eligible Borrower’s certifications and covenants, as well as any subsequent self-reporting by the Eligible Borrower. The Eligible Lender is not expected to independently verify the Eligible Borrower’s certifications or actively monitor ongoing compliance with covenants required for Eligible Borrowers under the Main Street term sheets.
How should an Eligible Lender evaluate an Eligible Borrower’s creditworthiness?
Eligible Lenders should view the eligibility criteria in the term sheets as the 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. Eligible Lenders will apply their own underwriting standards in evaluating the financial condition and creditworthiness of a potential borrower. An Eligible Lender may require additional information and documentation in making this evaluation and will ultimately determine whether an Eligible 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 receive the maximum allowable amount.
As of the date of this article, 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.