The Federal Reserve released the first term sheets (and little else) in early April 2020, leaving a comment period open through April 16, 2020. The initial program received over 2,200 comments during this period, and as a result, has undergone some significant changes (including the creation of a 3rd category of loan). The updated release on April 30, 2020 also provided an FAQ to help answer some additional questions that may exist, but many key questions, like how to apply, who is participating, and when the program starts, still exist.
Main Street Loan Program (MSLP) Overview
The primary objective of the Main Street Loan Program is to provide funding (or additional funding) to businesses that were in sound financial condition prior to the start of the COVID-19 Pandemic. All the loans will be 4-year term loans with a 1-year deferment on interest and principal (any unpaid interest will be capitalized) at a LIBOR + 3% rate. These loans will be originated and underwritten by participating Eligible Lenders under each lender’s pre-established lending standards. Any borrower that received a PPP Loan is eligible to borrow under this program, however, even with the Federal Reserve participation, these loans are not assured, and borrowers do not automatically qualify.
Comparison of 3 Main Street Loan Programs
The Main Street New Loan Facility (MSNLF) is designed to be new loans to borrowers from lenders provided under the terms of this program. The loans will have a minimum size of $500,000 and a covenant that the loan must be at least 4x the 2019 EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) of the borrower; this indirectly means a borrower must have had $125,000 of earnings.
The Main Street Priority Loan Facility (MSPLF) are also new loans to borrowers with slightly different terms than the MSNLF. The MSPLF has a higher EBITDA multiplier (6x), meaning that only $83,333.33 is required to get this loan, rather than $125,000 under the MSNLF. Further, the MSPLF can be used to refinance other debts, just not ones due to the Eligible Lender. These loans also include more “skin in the game” for the lender and allow for more leverage on the borrower.
The Main Street Expanded Loan Facility (MSELF) is increasing in current loans to borrowers for eligible lenders. This “upsized” tranche allows for borrowers to more easily expand their existing credit relationships with banks, but also have higher floors and EBITDA requirements.
While the program does not explicitly state, it is likely the borrower will require some form of assured financials (either a Review or Audit) to get one of these loans. Borrowers can apply for multiple MSNLF, MSPLF, or MSELF Loans; however, they cannot participate in all three programs. Participation in a PPP Loan does not exclude a borrower from these loans.
While something that did exist in the PPP it was somewhat largely ignored in coverage, by the SBA in its guidance and by banks, the SBA has set out limitations on the types of businesses that can borrow. The MSLP has elected to exclude some of these businesses as well. These include:
- Financial Businesses primarily engaged in lending, finance companies and factors or whose primary stock in trade is money
- Passive businesses owned by developers and landlords that do not actively use of occupy the assets; this can include shopping centers, salon suites, and similar business models, apartment buildings and non-healthcare residential facilities
- Life Insurance Companies
- Businesses Located in a Foreign Country
- Pyramid sale distribution plans
- Businesses with more than 1/3rd of revenue from legal gambling
- Businesses engaged in illegal activities
- Private Clubs
- Government owned entities
- SBA Loan Packagers
- Businesses with an associate who is incarcerated, on probation, or on parole
- Businesses owned by the Lender
- Businesses who provide goods or performances related to a prurient sexual nature
- Businesses that have previously defaulted on an SBA or similar loan
- Businesses engaged in political or lobbying activities
- Speculative businesses, including trading of assets, stocks, bonds, or financial instruments.
Beyond these, the terms of the program also allow exclusion for further modifications or exclusions by the Federal Reserve.
Compensation and Capital Distribution Restrictions
As part of the CARES Act, congress enacted a number of provisions that would restrict both the amount of compensation to be paid by borrowers and certain capital distribution limitations. These limitations are as follows:
These limitations will exist for the entire period the loan is outstanding plus for the period 12 months after the loan is repaid. It is crucial to note that these capital limitations extend to pass-through businesses, which will effectively eliminate the owner’s compensation for an extended period of time under this program.
Main Street Loan Program vs PPP vs EIDL
Unlike the PPP or EIDL, the MSLP is not administered or governed by the SBA, but rather is a Federal Reserve backed asset facility that banks can use to provide borrowers with additional liquidity at a lower risk to the bank. Its primary goal is to help companies that otherwise were in strong financial positions in 2019 weather the continuing COVID-19 storm. PPP Loans had a relatively limited requirement standard and a full federal guarantee and EIDLs are underwritten, but by the SBA with potentially less strict standards and include a potential federal guarantee (although not 100%).
Another difference between the MSLP and PPP Loans is that the MSLP loans do not have any federal guarantee or a forgiveness provision. The loans will be full-recourse to borrowers, generally on similar terms to other lending agreements borrowers may currently have.
The MLSP loans are also, in general, going to be higher sized than many PPP or EIDL loans and their loosened, but still high, requirements may exclude many borrowers that would otherwise be considered Main Street.
This program has been stated as to not be designed for nonprofit borrowers and therefore, they are NOT eligible borrowers. The FAQ guidance indicates that the use of EBITDA as the key underwriting metric is not a basis that nonprofit organizations are evaluated on. The guidance goes on to further say that the Federal Reserve “acknowledges” the unique needs of non-profit organizations and will be evaluating the feasibility of adjusting borrower eligibility for nonprofits in the future.
Applying for These Loans
The Federal Reserve has yet to announce a start date for this program, which will certainly influence Eligible Lenders as to when they will start accepting applications for these loans. The FAQ Guidance provided indicates that, not dissimilar to the PPP, borrowers will apply for these loans with banks or other lenders, however, there may not be the same expectation of going through an existing banking relationship. Borrowers will have to submit an application and any other required documentation to Eligible Lenders and, if interested in the program, should contact any banking relationships they may have to start the process.
Edward McWilliams, CPA
Ed is a Partner in the firm’s tax and business advisory practice focusing on providing services to middle market private companies across different industries as well as to early stage startups. Ed has over a decade of experience providing tax and business consulting services to these companies of different sizes and across different industries, bringing a broad and diverse knowledge base and strategic solutions to the many complex issues that businesses face.