CARES Law Update: Federal Reserve Releases First Guidance on Main Street Loan Program | Hodgson Russ LLP

This is an update of our March 30, 2020 alert summarizing the relief for the struggling industry described in the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”).

As noted in our previous alert, the CARES Act ordered the Federal Reserve and the Treasury Department to develop a program designed to boost direct lending to midsize businesses. On April 9, the Federal Reserve released its first guidance on the program, now known as the Main Street Lending Program (“MSLP”, or the “Program”).

As with other CARES Act programs, we are awaiting additional guidance as the program is implemented. It is important to consult your professional advisers before applying for a CARES Act assistance program for up-to-date information on eligibility and requirements.

Loans under the program will be made directly by financial institutions to eligible borrowers, who will then be able to sell 95% of the loans to the Federal Reserve. These may be either new loans under the new Main Street loan facility or an increased borrowing under an existing facility through the extended Main Street loan facility. The amount earmarked for the program is $ 600 billion.

Which companies are eligible?

The program aims to improve support for small and medium-sized enterprises that were in good financial health before the crisis. While the CARES Act stipulated that programs for midsize businesses would target businesses that would not otherwise receive assistance under the CARES Act, the Federal Reserve clarified that businesses receiving loans under the CARES Act Paycheque Protection Program can also apply for loans under the MSLP.

Eligible borrowers must:

  • Have up to 10,000 employees or up to $ 2.5 billion in 2019 annual revenue;
  • Be a business created or organized in the United States or under the laws of the United States; and
  • Have major operations and a majority of its employees based in the United States.

A borrower can participate in only one of the new loans or the extended loan facilities, not both. The borrower may also not participate in the Program if they have participated in the Primary Market Business Credit Facility established by the Federal Reserve in March.

Key overview: Important questions remain about eligibility. For example, the CARES Act stated that a minimum of 500 employees would be required for this program, but no minimum of employees is given, and the position that a PPP borrower can also apply under the MSLP indicates that no minimum cannot apply. Further, the guidelines imply that a US-based but foreign-invested transaction may be eligible, but no final confirmation has been provided. Finally, the methodology for determining the headcount and / or income of affiliated entities has not been established, but we assume that some aggregation will be necessary. We continue to monitor the Federal Reserve and the Treasury for updates on these points.

Which loans are eligible?

Under each of the new loans and extended loans in the program, the loans will be made by an eligible financial institution and must have the following characteristics (or, in the case of an extended loan, the increased tranche must have these characteristics) :

  • maturity 4 years;
  • Amortization of principal and deferred interest for one year;
  • Interest rate adjustable from the guaranteed overnight rate increased from 2.5% to 4%;
  • Minimum loan amount of $ 1 million; and
  • No early repayment penalty

Unlike the Paycheck Protection Program, loans granted under the program are non-repayable.

The other terms are slightly different between the new loan and the extended program loan. In addition to the loan conditions listed:

New loans. Newly issued loans are eligible for the program if issued on or after April 8, 2020, are unsecured term loans and have a maximum loan amount equal to the lesser of (i) $ 25 million or (ii) an amount which, when added to the borrower’s outstanding and committed existing debt but not used, does not exceed 4x the borrower’s 2019 EBITDA.

Extended loans. To be eligible for expansion, existing loans must have been issued before April 8, 2020, may be secured or unsecured (but if secured, the collateral must secure participation in the loan in the pro-rated tranche) and may have a maximum loan amount equal to the lesser of (i) $ 150 million, (ii) 30% of the borrower’s existing bank indebtedness outstanding and committed but not used, or (iii) an amount that, added to the borrower’s existing and committed but unused debt, does not exceed 6x the borrower’s 2019 EBITDA.

What restrictions and certifications are required?

The CARES Act listed a significant number of restrictions imposed on borrowers under the program. Several of these have been included in the certifications the Program will require from eligible borrowers and lenders, including certifications that:

  • The Borrower will comply with the restrictions on executive compensation, share repurchases and distribution of capital applicable to direct Treasury loan programs;
    • Share-based restrictions prevent any repurchase of shares or other shares, as well as dividends or distributions, during the term of the loan and for a period of 12 months after its repayment;
    • Under the executive compensation restrictions, employees earning more than $ 425,000 per year will not be eligible for any compensation increases exceeding 2019 levels, and employees earning more than $ 3,000,000 per year will see a reduction of remuneration based on the formula described in the CARES Act, in each case as long as the loan remains unpaid and for a period of 12 months thereafter.
  • The Borrower will not use the proceeds of a Program loan to repay other loan balances and will not repay debt of equal or lower priority (except for mandatory principal payments) until the Program loan has been fully repaid;
  • The lender will not use the loan proceeds to repay or refinance any pre-existing loans or lines of credit made by the lender to the borrower;
  • Neither the borrower nor the lender will cancel or reduce, nor seek to cancel or reduce, existing lines of credit;
  • The borrower fulfills the EBITDA leverage condition;
  • The borrower is in need of financing due to the emergency circumstances created by the COVID-19 pandemic and that by using the loan proceeds he will make reasonable efforts to maintain his payroll and retain his employees during the term of the loan.

Key overview: The attestations do not fully reflect the requirements of this CARES-mandated program, including restoring and maintaining 90% of the workforce at full pay and benefits, restrictions on job relocation and the repeal of existing collective agreements during the term of the loan and for a period of 2 years afterwards, as well as the neutrality required in the response to any unionization effort. As we pointed out in our previous alert, we believe that certain union restrictions described in the CARES Act may be contrary to applicable law and the US Constitution. It is not clear whether the program loans will also include these requirements.

Hodgson Russ will continue to monitor this relief and will issue updates as we receive more information from the federal government and financial institutions implementing these programs.

Please see our Coronavirus Resource Center and CARES Law page to view many other alerts that our attorneys in various practice areas have posted on topics related to the pandemic.

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