As we await further guidance from the SBA on the Paycheck Protection Program’s application process for 1099’s and Sole Proprietorships (applications are supposed to go live today), we received some additional good news yesterday from the Federal Reserve on the Main Street New Loan Facility.
Per usual, the announcement came with no guidance on process or timeline on rollout but the Main Street Program is another opportunity for small and medium-sized business owners to manage through the crisis. The program does not provide an opportunity for loan forgiveness but does offer significant payment deferral and low-interest rates. Also, even if you are utilizing forgivable PPP funds, you are eligible for the Main Street Loans as well.
Here’s what you need to know:
Overview: The Federal Reserve Bank is committed to lend to a single, Special Purpose Vehicle (SPV) that will purchase 95% of Main Street Loans from eligible lenders. This program provides up to $600B of financing to lenders that make direct, unsecured loans to businesses. Essentially lenders will only be on the hook for 5% of the loans issued through this program.
Eligible Lenders: Eligible Lenders are U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies.
Eligible Borrowers: Eligible Borrowers are businesses with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues. This program is designed to include medium-sized businesses not addressed with PPP loans. However, small businesses can certainly take advantage.
In addition to employee and revenue requirements, Eligible Borrowers must be a business that is created or organized in the United States or under the laws of the United States with significant operations in and a majority of its employees based in the United States (unclear on the detailed requirements here).
Lastly, Eligible Borrowers can not participate in other facilities such as the Main Street Expanded Loan Facility (MSELF) or the Primary Market Corporate Credit Facility. These are different facilities from the Main Street New Loan Facility that we’re talking about here (even though names are similar).
Loan Terms: An Eligible Loan is an unsecured term loan made by an Eligible Lender(s) to an Eligible Borrower that was originated on or after April 8, provided that the loan has the following features:
- Term: 4-year maturity
- Loan Size: Minimum loan size of $1 million. Maximum loan size is the lesser of $25 million or an amount that, when added to the Eligible Borrower’s existing outstanding and committed but undrawn debt, 4 times 2019 EBITDA. Essentially 4X 2019 EBITDA minus outstanding debt.
- Payment Deferral: Amortization of principal and interest deferred for one year
- Interest Rate: Adjustable rate of the Secured Overnight Financing Rate (SOFR) + 2.5% to 4%. So essentially this is the SOFR which is currently at 0.01% plus 2.5% to 4% (2.6% to 4.1% currently).
- Fees: Lender will pay 1% of Loan Principal to the SPV (95% portion that was purchased), but can pass that cost along to borrowers. Borrower also has to pay a 1% loan origination fee to the lender and the SPV will pay the lender .25% to service the loan.
- Prepayment Penalty: None
- Program End Date: September 30th, 2020 (unless extended)
Attestations Needed to Qualify:
- The Lender must attest the proceeds of the loan will not be used to repay or refinance pre-existing loans or lines of credit made by the lender to the borrower.
- The Borrower cannot use the loan proceeds to repay other loan balances. The “Eligible Borrower must commit to refrain from repaying other debt of equal or lower priority, with the exception of mandatory principal payments, unless the Eligible Borrower has first repaid the Eligible Loan in full”.
- The Lender must attest they will not cancel or reduce existing lines of credit when issuing this loan. The borrower cannot cancel existing lines of credit with the lender as well.
- The Borrower must attest that it requires financing due to the exigent circumstances presented by Coronavirus, and that the Borrower will “make reasonable efforts” to use loan proceeds to maintain its payroll and retain its employees during the loan term. Previous reports have said this could include a requirement that the Borrower would need to retain 90% of their employees until September 30th, 2020, but this was not specified in the official release by the Fed.
- Borrower must attest to the EBITDA calculation when determining loan size.
- Borrower must attest that it will follow compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act. No stock repurchases, dividends, and compensation limits for 12 months.
- Lenders and Borrowers will each be required to certify that the entity is eligible to participate in the Facility.
As mentioned above, there has been no formal guidance on the application process for the Main Street Loans, but the program will be administered by approved lenders like the PPP loans.
According to CNBC:
“The application process will certainly vary by bank – larger banks may leverage a portal to take in applications, while smaller banks may require an application and supporting documentation to be submitted to a specific branch or through email,” said Brandon Koeser, senior manager and financial services senior analyst with RSM US LLP, a middle-market consulting firm.
If your bank is using a portal to collect applications for the Paycheck Protection Program, it’s “more likely they’ll use a portal” for Main Street loan applications, he added.
Documentation is expected to be similar to the PPP Loan program, but unlike PPP revenue will come into play in determining loan eligibility.
As Compass East learns more details about the program, we will provide guidance on how to apply for these loans in the coming weeks.
John Lanahan
Director Of Financial Strategy
john.lanahan@compasseast.com