The Federal Reserve continues to roll out loan programs under the CARES Act to support the US economy and stimulate consumer spending.
The Main Street Lending Program (MSLP) provides borrowers who may not qualify for conventional financing access to loans needed to help compensate for COVID-19 business disruptions, losses, and hardships. Terms of MSLP loans, which start at a minimum $1 million, are more favorable with lower interest rates, one-year deferrals on repayment, and no requirements for collateral.
However, businesses should remain cautious and question: can you really afford the increased financing at this time? Is this a temporary bridge to times when cash flow will improve, or will this create undue hardship in the long-run? These loans are not forgivable, like the Paycheck Protection Program, and must be repaid.
On April 9, the Federal Reserve announced the Main Street Lending Program (MSLP), a new lending program contained in the $2.3 trillion stimulus for small and medium-sized businesses. The MSLP contains two loan facilities: Main Street New Loan Facility (MSNLF) and Main Street Expanded Loan Facility (MSELF), each with different loan maximum levels. The combined size of the two facilities is $600 billion.
These new credit facilities require borrowers to attest that the loans are needed due to circumstances presented by COVID-19, and commit to making reasonable efforts to maintain payroll and retain workers. Otherwise, the loans do not have extensive restrictions. Generally, the proceeds must not be utilized to repay existing debt.
The terms of the MSLP loans are more favorable than conventional bank financing. They have low interest rates, do not require security, and repayment is deferred for a year. Loans under the MSLP program will not be forgiven as with the SBA Paycheck Protection Program (PPP) loans. However, companies that have obtained a PPP loan may also obtain financing under the MSLP.
The SBA Economic Injury Disaster Loans (EIDL’s) also provide loans to companies impacted by COVID-19. These loans are only available to businesses with up to 500 employees and a maximum loan amount of $2 million. In addition, the EIDL’s require collateral or guarantees on loan amounts greater than $200,000, if it is available.
Eligible borrowers are businesses with up to 10,000 employees or up to $2.5 billion in 2019 revenues. So, the program is designed for much larger businesses than the SBA Paycheck Protection Program (PPP) which is limited to 500 or fewer employees. The borrower must be a business that is created, organized, or under the laws of the United States with significant operations in and a majority of its employees based in the U.S.
Eligible lenders are U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies.
The terms of the MSLP loans are as follows.
- Bear interest at the Secured Overnight Financing Rate (SOFR), plus 250-400 basis points (the SOFR rate at April 13, 2020 was .02%)
- Principle and interest payments are deferred for a year, then payable over four years
- Prepayment without penalty
- Minimum loan size: $1 million
- Maximum loan size:
- MSNLF – the lesser of (i) $25 million or (ii) an amount that, when added to the Eligible Borrower’s existing outstanding and committed but undrawn debt, does not exceed four times the Eligible Borrower’s 2019 earnings before interest, taxes, depreciation, and amortization (“EBITDA”)
- MSELF – the lesser of (i) $150 million, (ii) 30% of the Eligible Borrower’s existing outstanding and committed but undrawn bank debt, or (iii) an amount that, when added to the Eligible Borrower’s existing outstanding and committed but undrawn debt, does not exceed six times the Eligible Borrower’s 2019 EBITDA
Note: Since the interest rate on these loans is low compared to what would be considered a market rate, financial accounting rules may dictate that the loans are discounted when recorded in a company’s financial statements.
MSLP Program Funding
The various components of the MSLP funding are as follows:
- The Department of the Treasury makes a $75 billion equity investment in a single common special purpose vehicle (SPV)
- The Federal Reserve Bank lends funds to the SPV
- The SPV purchases 95% participations in loans from eligible lenders
- Lenders retain 5% of the loans, and service the loans
Since the lender will be retaining 5% of the loans, they will be taking risk and will therefore need to perform underwriting sufficient to evaluate risk and loan monitoring.
Key Loan Requirements
- The lender must attest that the proceeds of the loan will not be used to repay or refinance pre-existing loans or lines of credit made by the lender.
- The borrower must commit to refrain from using the proceeds of the eligible loan to repay other loan balances.
- The lender must attest that it will not cancel or reduce any existing lines of credit outstanding to the borrower.
- The borrower must attest that it will not seek to cancel or reduce any of its outstanding lines of credit with the lender or any other lender.
- The borrower must attest that it requires financing due to circumstances presented by the coronavirus disease 2019 (“COVID-19”) pandemic, and that, using the proceeds of the loan, it will make reasonable efforts to maintain its payroll and retain its employees during the term of the loan.
- Eligible lenders and borrowers will each be required to certify that the entity is eligible to participate in the facility, including in light of the conflicts of interest prohibition in section 4019(b) of the CARES Act.
- Borrowers must follow compensation, stock repurchase, and dividend restrictions, as follows:
Total compensation to officers or employees exceeding $425,000 in 2019 is frozen and total compensation to officers or employees exceeding $3 million is limited to the sum of (i) $3 million and (ii) 50% of the excess over $3 million received by the officer or employee in 2019.
- The borrower must agree for a period of 12 months from the date such loan is no longer outstanding, not to buy back any equity securities of the borrower or any parent company that are listed on any national securities exchange.
- The borrower must agree not to pay any dividend or make other capital distribution.
What to Consider
The Main Street Lending Program was designed to assist companies impacted by the current pandemic. The MSLP credit facilities are excellent options as bridge financing. However, while the terms of the debt are favorable, the loans still must be repaid over five years, as opposed to the SBA PPP loans, a majority of which can be forgiven if utilized for payroll and other allowable expenses. As a result, companies should develop a business and financial plan that provides for repayment of these loans, just as they would when taking on any new debt financing.
If a company is considering an MSLP loan, they should:
- Prepare a cash flow forecast that accounts for conservative operational projections and the additional debt service.
- Review existing debt agreements to determine if there are limitations on additional borrowings; and whether the additional financing would create covenant compliance issues.
For many companies, the Main Street Lending Program could provide much-needed financing that helps them survive these uncertain times.
Brian Grant, CPA
Aldrich CPAs + Advisors LLP
Brian Grant has over 25 years of experience working with public and private companies in manufacturing, technology, telecommunications, construction, and private equity investments. He is skilled in the valuation and analysis of businesses, quality of earnings and due diligence procedures, and business transaction support. Brian previously worked with a West Coast regional CPA firm for…
- Private-equity investments
- Closely-held businesses
- Certified Public Accountant
- Due diligence procedures
- Valuation and analysis of businesses