Further revisions to the Main Street Lending Program
By: Dean Dorton | June 11, 2020
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Revisions announced by the Federal Reserve Board on June 8 introduce new terms meant to expand interest in the “soon-to-be available” loan facilities offered under the Main Street Lending Program.
COVID-19 | COVID-19 SBA Loan Programs | Uncategorized
Revisions announced by the Federal Reserve Board (the Board) on Monday, June 8, introduce new terms meant to expand interest in the “soon-to-be available” loan facilities offered under the Main Street Lending Program (the Program). As the Board continues to create the necessary infrastructure to operationalize the loan Program, it has been seeking feedback from lenders and borrowers and refining the Program terms and FAQs in an attempt to stave off questions once the Program is up and running. The current changes are summarized and shown in the tables below.
Lower minimum and higher maximum loan amounts
In an attempt to widen the net of borrowers who may apply for a Program loan, the minimum loan amounts for both the New Loan and Priority Loan facilities were cut in half (previously $500,000). In contrast, the maximum loan amounts were increased to $35,000,000 and $50,000,000 (previously $25,000,000 for both), respectively. No changes were made to the minimum loan amount under the Expanded Loan, while the maximum was increased to $300,000,000 (previously $200,000,000).
Extension of loan terms and principal payment deferral period
Loan terms for each of the Program options have been increased to five years (previously four). Similarly, payments of loan principal are now deferred for two years, while interest payments remain deferred for one year. Required principal payments beginning subsequent to the deferral period are structured as 15%, 15% and 70% for years three through five, respectively. Borrowers are able to prepay loans without penalty.
Required financial reporting covenants
Each Program loan is expected to contain a financial reporting covenant that requires borrowers to submit certain quarterly and annual financial information and calculations to lenders. The information required for submission varies based upon the loan option and will be required to be presented in accordance with Generally Accepted Accounting Principals (GAAP). Further details on the specific financial information requested can be found in Appendix B – Section IV and Appendix C of the Program FAQ Guide.
Revised Loan Option Terms
Note: most recent revisions to loan terms are in bold font within the table below.
|Main Street Lending Loan Options|
|New Loan||Priority Loan||Expanded Loan|
|Maximum||Lesser of $35,000,000 or 4x 2019 adjusted EBITDA||Lesser of $50,000,000 or 6x 2019 adjusted EBITDA||Lesser of $300,000,000 or, when added to the outstanding or undrawn available debt, does not exceed 6x 2019 adjusted EBITDA|
|Term||Five years||Five years||Five years|
|Interest Rate||LIBOR (1 or 3 month) + 3%||LIBOR (1 or 3 month) + 3%||LIBOR (1 or 3 month) + 3%|
|Principal Repayment||Year 3: 15%
Year 4: 15%
Year 5: 70%
|Year 3: 15%
Year 4: 15%
Year 5: 70%
|Year 3: 15%
Year 4: 15%
Year 5: 70%
|Eligible Loans||Secured or unsecured term loan originated after April 24, 2020||Secured or unsecured term loan originated after April 24, 2020||Secured or unsecured term loan or revolving credit facility originated on or before April 24, 2020, with a remaining maturity of at least 18 months|
|Lender Risk Retention||5%||5%||5%|
|Origination Fee||1.00% of the principal amount||1.00% of the principal amount||0.75% of the principal amount related to incremental loan|
|Transaction Fee1||1.00% of the principal amount||1.00% of the principal amount||0.75% of the principal amount related to incremental loan|
1 At the discretion of the lender, these fees may be paid by the borrower.
In addition to the revised loan terms noted above, borrowers evaluating a loan option under the Program should keep in mind the following Program features:
- While nonprofit organizations are still unable to participate in the Program, the Board is continuing to work on establishing a separate program for these organizations.
- Businesses who received a Paycheck Protection Program (PPP) loan or Economic Injury Disaster Loan (EIDL) are eligible to participate in the Program.
- Affiliate rules need to be considered for businesses with domestic and/or foreign affiliates. Proceeds of a Main Street Lending Program loan may not be used for the benefit of any foreign affiliates (including parent or subsidiary businesses). Refer to sections E.9. and E.10. within the FAQ Guide for further details.
- Loan proceeds may be used to refinance or pay regular interest and/or principal payments on existing loans with lenders that are not the same as the lender participating in the Program loan. To be eligible for payment, interest and/or principal payments must be previously scheduled as mandatory and due (whether regularly scheduled or upon a trigger event requiring mandatory prepayment) prior to loan origination of a Program loan.
- Eligible businesses will be required to demonstrate that they are “unable to secure adequate credit accommodations from other banking institutions.” However, this does not mean that no credit is available from other sources. Rather, this could mean that the credit available elsewhere is inadequate based on the price, terms, etc. from other institutions. Borrowers must certify to this but will not be required to retain or submit documentation that supports their conclusion.
General Program Terms
General program terms were unchanged except for an allowance of a two-year deferral of principal payments.
|Size||Up to $600 billion|
|End Date||September 30, 2020 (start date is currently unknown)|
|Eligible Business Criteria||A for-profit business that meets all the following:
|Forgiveness||The loan is not forgivable|
|Payment Deferral||Payments on principal deferred for two years and interest deferred for one year|
|Prepayment||Permitted without penalty|
|Tax Treatment||Treated as indebtedness for tax purposes|
2 For information and examples on what constitutes “significant,” refer to section E.8 of the FAQ Guide.
3 Ineligible businesses are defined as those listed in 13 CFR 120.110(b)-(j), (m)-(s) and further modified and clarified through subsequent SBA PPP interim final rules found (1) here (2) here and (3) here.
For general term definitions, including “business” and “affiliate,” as well as how-to information for calculating employees and annual revenue, refer to the FAQ Guide.
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