Main Street Lending Program: An Alternative Funding Source*

Small business owners anxiously refreshed their email inboxes hoping for some word from the U.S. Small Business Association (“SBA”) on their fate under the Paycheck Protection Program (“PPP”). To the shock of thousands, the SBA announced on April 17 that it had already depleted nearly $350 billion set aside to support small business owners. In light of this announcement, many small business owners who did not receive funding scrambled to find capital to keep their businesses afloat. Luckily, on April 23, the House approved an additional $380 billion in funding for the PPP which went into effect on April 27. In addition to the renewed PPP funds, the Federal Reserve recently announced that it is rolling out a $600 billion program that will provide loans to eligible small and mid-sized businesses. This program, known as the Main Street Lending Program, serves as a beacon of hope for small and mid-sized businesses across the nation; however, small businesses may have a more difficult time qualifying for MSLP than the PPP for reasons discussed below.

The CARES Act, PPP, and MSLP

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) directed various government institutions to develop programs to support small and medium-sized businesses during the coronavirus pandemic. In response, the SBA created the Paycheck Protection Program, which allowed small businesses to apply for loans that could be forgiven by the SBA upon maintaining payroll for eight weeks. Unfortunately, two weeks after small businesses were instructed to apply, the SBA announced that it had already depleted the nearly $350 billion allotted to the PPP program by approving 1,661,367 loans. Of those approved loans, Kentucky small business owners received less than 24,000 loans and Ohio business owners received just shy of 60,000 loans.

In light of how quickly the PPP funding was depleted, the House approved an additional $380 billion in PPP funding in a new stimulus bill on April 23. Small business owners who applied but did not receive funding under the original PPP, in addition to small businesses applying for the first time, may seek funding under the new stimulus bill. After PPP resumed on April 27, many small and mid-sized businesses received funding, especially small lending facilities and minority-owned businesses. However, small businesses that did not receive funding under PPP may use an alternative route for receiving emergency capital: the Main Street Lending Program.

The Federal Reserve recently created the Main Street Lending Program (“MSLP”) which will provide approximately $600 billion in loans to small and mid-sized business owners, including $75 billion from the Treasury. The MSLP will allow small and mid-sized businesses to apply for new or increased loans of not less than $500,000 from eligible lenders. The conditions for MSLP loans are discussed below.

The MSLP

The MSLP is expected to go into effect in the coming weeks. Once effective, the MSLP will be comprised of three programs: the Main Street New Loan Facility (“MSNLF”), the Main Street Priority Lending Facility (“MSPLF”), and the Main Street Expanded Loan Facility (“MSELF”). Under the MSNLF, eligible businesses may seek new loans from eligible lenders. In contrast, the MSELF will allow businesses with existing loans with an eligible lender to have their loans increased. The MSPLF was added to the MSLP on April 30 in response to nearly 2,200 comment letters. The MSPLF is intended to provide eligible borrowers that are more highly leveraged with new loans.

Eligible Borrowers

U.S. Businesses with up to 15,000 employees or $5 billion in 2019 annual revenues are eligible for an MSLP loan. The three loan programs under the MSLP are mutually exclusive, such that a business may not participate in the programs simultaneously, nor may a MSLP borrower participate in the Primary Market Corporate Credit Facility.

Eligible Lenders

Eligible Lenders are U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies.

Eligible Loans

Businesses may apply for new or upsized tranche loans under the MSLP. Businesses must apply for a minimum loan amount of $500,000 under the MSNLF and MSPLF programs or $10 million under the MSELF. Maximum loan amounts vary between the MSNLF, MSPLF, and MSELF programs from $25 million to up to $200 million. The MSLP loans are four-year loans with adjustable interest rates of LIBOR + 3%. The amortization of principal and interest will be deferred for one year, however, prepayment is permitted without penalty. These loans are not eligible for forgiveness, which is one of many distinguishing factors between the MSLP and the PPP programs as discussed in detail below.

Loan Participations

A Federal Reserve Bank will set up a Special Purpose Vehicle (SPV) to purchase 95 percent participation in loans originated by Eligible Lenders under the MSELF and MSNLF programs. Eligible Lenders will retain 5 percent of the loans. Under the MSPLF program, the SPV will purchase 85 percent participation in Eligible Loans. Eligible Lenders will retain 15 percent of each Eligible Loan. The SPV and Eligible Lender will share risk in the new or upsized tranche loans on a pari passu – or equal footing – basis.

Required Certifications and Covenants for Use of MSLP Loans

Businesses must refrain from using the MSLP loans to repay other loan balances that the businesses may have with the lender.
Unless the loan is repaid in full, businesses must refrain from using the MSLP loans to repay other debts of equal or lower priority, with the exception of mandatory principle.
Businesses must attest that they will not seek to cancel or reduce any of their outstanding lines of credit with the Eligible Lender or any other lender.
Businesses must make “reasonable efforts” to maintain payroll and retain employees during the term of MSLP loan.
Businesses must attest that they meet certain EBITDA leverage requirements.
Business must follow the compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under Section 4003(c)(3)(A)(ii) of the CARES Act:
- For one year after the loan is no longer outstanding, borrowers cannot: (1) engage in stock buybacks (except as required by any contractual obligation in effect as of March 27, 2020); (2) pay dividends or other capital distributions; nor (3) pay certain employees compensation in excess of 2019 amounts.
- The business must comply with the following compensation limits from the date of loan execution until one year after the loan is repaid: (1) officers or employees whose compensation exceeded $425,000 in the 2019 calendar year may not receive more than their 2019 total compensation during any 12 consecutive month period nor severance benefits totaling more than twice the employee’s 2019 total compensation; (2) Officers or employees earning more than $3 million in 2019 may not earn more than $3 million-plus half the amount of their compensation in excess of $3 million. For purposes of these compensation limits, “total compensation” means salary, bonuses, awards of stock, and other financial benefits provided by the business.
Businesses must be eligible to participate in the MSLP, including in light of the conflicts of interest prohibition in Section 4019(b) of the CARES Act.
- Section 4019(b) prohibits any entity that is “controlled” by the President, Vice President, head of an Executive Department, or Member of Congress (or any of their immediate family, including in-laws), from being eligible as a borrower or lender under the MSLP.

Fees Associated with MSLP Loans

MSNLF and MSPLF: Eligible Lenders will pay to the Main Street SPV a transaction fee of 100 basis points of the principal amount of the MSNLF and MSPLF loan at the time of origination, and may pass on this fee to Eligible Borrowers an origination fee of 100 basis points of the principal amount of the loan. In addition, the Eligible Borrower will pay the Eligible Lender a fee of up to 100 basis points of the principal amount of the MSNLF or MSPLF Loan at the time of origination. Eligible Lenders have discretion over whether and when to charge Eligible Borrowers this fee.
MSELF: Eligible lenders will pay the Main Street SPV a transaction fee of 75 basis points of the principal amount of the Upsized Tranche at the time of upsizing and may pass this fee to Eligible Borrowers. In addition, the Eligible Borrower will pay an Eligible Lender a fee of up to 75 basis points of the principal amount of the MSELF Upsized Tranche at the time of upsizing. Eligible Lenders have discretion over whether and when to charge Eligible Borrowers this fee.
Servicing Fee: The SPV will pay the Eligible Lender 25 basis points of the principal amount of its participation in the new loan or upsized tranche of the loan per year for loan servicing.

Distinguishing the MSLP from PPP

Many small and mid-sized businesses owners may be wondering how the Main Street Lending Program compares to the Paycheck Protection Program. Below are some of the distinguishing factors between these programs.

Administration: The PPP is administered by the U.S. Small Business Administration. The MSLP will be administered by the Federal Reserve.
Loan Forgiveness: The PPP allows loans to be partially or fully forgiven upon satisfaction of certain circumstances. MSLP loans will not be forgiven under any circumstances.
Employee Retention: Under the MSLP, businesses need only make “commercially reasonable efforts” to maintain payroll and retain employees. Under the PPP, forgiveness of borrowers’ loans is contingent upon certain strict conditions like retaining employees on the payroll for eight weeks.
Term: The repayment term on MSLP loans is four years, while the PPP loans only have a two-year repayment term.
Minimum Amount: The MSNLF and MSPLF minimum loan amount for new loans is $500,000. The minimum loan amount for MSELF upsized tranche loans is $10 million. There is no minimum loan amount required to apply for a PPP loan.
Maximum Amount: The PPP loans have a maximum loan amount of $10 million. The MSLP loans have varying maximum loan amounts, depending on whether the business is applying for a new loan or has an existing loan.
Interest: PPP loans have a fixed 1% interest rate, while MSLP loans have an adjustable-rate of LIBOR + 3%.
Restrictions: The MLSP has fewer restrictions on how companies can use their loans. The MLSP restrictions prohibit borrowers from using the loans to repay debt payments or refinance, but the Federal Reserve has not outlined any hard restrictions beyond these prohibited uses. In contrast, the PPP prohibits borrowers from using more than 25% of the loan to cover non-payroll operating costs. This strictly limits what small business owners can do with their PPP loan.

Conclusion

The MSLP appears to be a promising alternative for some small to mid-sized businesses who did not receive funding under the PPP; however, many small businesses will not be eligible for this program. The MSLP minimum loan amount of $500,000 makes it impracticable for many small and mid-sized businesses to apply. This is especially true in light of the SBA’s Paycheck Protection Program (PPP) Report, released on April 16, 2020, which estimated that approximately 75% of applicants for PPP loans requested $150,000 or less. Furthermore, the lack of loan forgiveness, higher interest rates, and mandatory fees make the MSLP an unworkable solution for many small businesses. Thus, while the MSLP loans may benefit some mid-sized companies, many small businesses may still be shut out from emergency funding.

*DBL Law Clerk Emma Gripshover contributed to this article.