The Federal Reserve recently proposed a $600 billion dollar business lending program that will operate as a companion to the Paycheck Protection Program (the “PPP”) established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The Main Street Lending Program (“MSLP”) will provide support to both small and medium sized businesses, including some too large to qualify for the PPP. Unlike loans under the PPP, MSLP loans will not be eligible for forgiveness, but instead will operate like traditional loans, with significantly lower interest rates and other terms.
The Federal Reserve is working to finalize details of the MSLP, based in part on its review of initial feedback to the proposal. More information will be released by the Federal Reserve, as soon as it becomes available, therefore the details of the MSLP are subject to change. Below is a summary of some of the initial terms and conditions of the proposal released by the Federal Reserve.
- U.S. companies with up to 10,000 employees and $2.5 billion in 2019 annual revenue.
- The Borrower may have received lending under the PPP, but eligibility under the PPP is not necessary to qualify for the MSLP.
- U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies.
- The MSLP will offer two types of loans: “New Loans” and “Expanded Loans”.
- “New Loans” are term loans that originate on or after April 8, 2020 and will range from $1M up to a maximum of $25M. “Expanded Loans” are term loans used to increase the borrowable amount under the Borrower’s previously existing term loan, and will range from $1M up to a maximum of $150M.
- Loans will be managed through the Borrower’s bank.
- All loans under the MSLP will have a 4-year term, with amortization of principal and interest payments deferred for first year.
- Interest rate equal to the “secured overnight financing rate” plus 250 to 400 basis points.
- The “secured overnight financing rate”, or “SOFR” is the rate intended to replace US LIBOR in future lending facilities. As of April 16, 2020, the SOFR is 0.03%.
- No prepayment penalty.
- Eligibility for borrowing under the MSLP expires on September 30, 2020, unless extended by the U.S. Treasury Department.
- A Borrower cannot obtain both a “New Loan” and an “Expanded Loan”.
Required Conditions for Borrowing
- The Borrower may not use MSLP funds to repay or refinance preexisting loans and lines of credit.
- The Borrower must confirm that it requires financing due to exigent circumstances presented by COVID-19, and that it will use proceeds to maintain its payroll and retain its employees during the term of the loan.
- The Borrower must satisfy conflicts of interest requirements and will be subject to certain compensation, stock repurchase and distribution restrictions established under the CARES Act.
If you have any questions about Main Street Lending Program, please contact your SGK Attorney.