As a result of the Coronavirus Aid, Relief & Economic Security (CARES) Act enacted on March 27, the Federal Reserve has created the Main Street Lending Program to provide a total of $600 billion in financing for eligible small and medium-sized businesses. The Federal Reserve announced the Main Street Lending Program on April 9.

rick papworthThe $600 billion in loan facilities to employers is for those who have been in good standing prior to the onset of the COVID-19 crisis. All loans are made by private financial institutions but backed by the Federal Reserve. To encourage banks to lend, the Federal Reserve will buy 95 percent of new or existing loans to qualified employers, while the issuing bank will retain 5 percent to discourage irresponsible lending. In exchange for the loan, employers must make reasonable efforts to maintain payroll and retain workers.

Am I Eligible?

To be eligible, a business must meet the following requirements:

• It must be a U.S. company established before March 13, 2020. 

• It must have fewer than 15,000 employees or less than $5 billion in 2019 revenue. (The SBA’s affiliation rules apply in determining the employee and revenue count.)

• It must have significant operations in and a majority of its employees based in the United States.

• It did not receive support pursuant to the CARES Act Subtitle A of Title IV (for air carriers, air cargo and businesses critical to national security).
• It did not participate in one of the other Main Street loan facilities or the Primary Market corporate Credit Facility.

• It is not an ineligible business under the Paycheck Protection Program (PPP).

Companies that participated in the PPP program may also apply for Main Street loans.  Employers taking loans must follow restrictions on compensation, stock buybacks and dividend payments that apply to loan programs under the CARES Act.

How much can I borrow under this program?

The program consists of three parts that would impact for-profit manufacturing businesses. A business can only participate in one of the programs. The eligibility criteria are the same for each program and the eligible lenders are the same. The three parts or programs are the Main Street New Loan Facility (MSNLF), the Main Street Priority Loan Facility (MSPLF) and the Main Street Expanded Loan Facility (MSELF).

The MSLP offers loans to eligible employers with a five-year repayment term.  The interest rate is LIBOR (1 or 3-month) plus 3 percent (300 basis points). Currently the one-month LIBOR is 0.17 percent and 3-month LIBOR is 0.25 percent. One year ago, these rates were 2.17 and 2.15, respectively. Interest payments on these loans are deferred for one year and the principal repayments are deferred for the first two years. The borrower must repay 15 percent of the principal in each of the third and fourth years. The remaining 70 percent is due in the final year. Depending on the specific Main Street lending program, a business can borrow from $250,000 to $300 million.

Unlike PPP loans, Main Street loans are full-recourse and are not forgivable. The chart at right shows details of each of the three MSLP loan options.

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-COVID indebtedness a borrower may have incurred.

MSNLF:  The loan must not be, at the time of origination or any time during the term of the loan, subordinated in terms of priority to any of the borrower’s other loans or debt instruments.

MSPLF:  At the time of origination and at all times thereafter, the loan must be senior to the borrower’s other loans or debt instruments, other than mortgage debt.

MSELF:  With this program, lenders increase a borrower’s existing term loan or revolving credit facility.  At the time of upsizing and at all times thereafter, the upsized tranche must be senior to the borrower’s other loans or debt instruments, other than mortgage debt.

How long will the MSLP be in effect?

The program was established to respond to the uncertainty related to the COVID-19 pandemic and will continue until Dec. 31, 2020 unless it is extended by the Federal Reserve Board and the Treasury Department.

How do I apply for a program loan?

To obtain a loan under the program, an eligible borrower must submit an application and any other documentation required by an eligible lender to such eligible lender. Eligible borrowers should contact an eligible lender for more information on whether the lender plans to participate in the program and to request more information on the application process.  Contact your lender to see if they are an eligible lender participating in the Main Street Lending Program.

Rick Papworth is the president of Impact Utah and has spent most of his career as CFO, leading both public and private companies in strategy and capital management. Impact Utah, a premier resource and advisor for Utah manufacturers, is a member of the Utah Industry Resource Alliance.

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