Main Street Lending Program: An Unprecedented Move
The Coronavirus pandemic has forced some of the most unprecedented government actions that we’ve seen in decades. One of them being the Main Street Lending Program. Why so unique? Because this is the first time since the Great Depression that the Federal Reserve is lending to organizations outside of the banking industry. And it’s big news.
Of course, this type of news produces various conflicting opinions and interpretations of the program. Here we’ve attempted to simplify the information and provide answers to many of the questions we are receiving.
What is the Main Street Lending Program?
Bottom line, the Main Street Lending Program is a vehicle through which the Federal Reserve Bank of the United States will purchase a percentage of eligible loans that are given to small or medium businesses that have been negatively impacted financially by the coronavirus pandemic.
The Federal Reserve has allocated $600 Billion Dollars towards this initiative, and the U.S. Treasury has set aside $75 billion to offset potential losses due to the high-risk nature of this lending program.
Banks will be the actual lenders to the borrowing businesses, but the Federal Reserves will buy up to 95% of the cost of the loan to minimize risk to the banks themselves.
The loans terms will be for up to four years, below market rates, and payments can be deferrable for up to one year. The current minimum loan size is $500,000 and the current maximum loan size is $200 million.
In some cases, borrowers will be able to use the loan to refinance existing debt.
However, Main Street loans are not forgivable. Under section 4003(d)(3) of the CARES Act, the amount of a Main Street loan cannot be reduced through loan forgiveness.
The Federal Reserve will stop purchasing loan participations on September 30, 2020 unless it is decided that the program will be extended.
Who can Apply for a Loan through the Main Street Lending Program?
Eligible businesses must have either 15,000 employees or less or have had 2019 revenues of $5 billion or less. They also must have been established prior to March 13th, 2020.
Eligible businesses must be U.S. businesses created or organized in the United States (or under the law of the United States) with the majority of all operations and employees located within the U.S.
Borrowers must not have participated in the Primary Market Corporate Credit Facility (PMCCF), and they must not have received any prior support under section 4003(b)(1)-(3) of the CARES Act.
Non-profit organizations are not currently eligible at this time.
The goal of this program was to extend relief to medium-sized businesses who were in good financial standing before the COVID-19 pandemic, and have suffered due to local government stay-at-home and closure orders. More specifically, the targeted businesses seem to be those that fell between the PPP loans for small businesses and the large businesses that are able to sell bonds to the Federal Reserve corporate lending facilities.
To minimize risk and to increase effectiveness of the loan, the Federal Reserve wants to avoid lending to businesses that were in poor standing and at severe financial risk before the pandemic, and they also want to avoid lending to businesses that have maintained good financial standing despite the pandemic.
What are the Three Different Types of Loans through the Main Street Lending Program?
There are currently three different loan options under the Federal Reserve Main Street Program. Each of the three options adhere to the same exact eligibility rules and terms stated above. Other features, such as how the loan deals with the borrower’s already outstanding debt, differ between options.
Type 1: the MSNLF (Main Street New Loan Facility)
In this option, eligible lenders extend new loans to eligible borrowers ranging in size from $500,000 to $25 million. The maximum size of this loan cannot exceed four times the Eligible Borrower’s adjusted 2019 earnings before interest, taxes, depreciation, and amortization when added to the borrower’s pre-crisis outstanding and undrawn available debt.
Type 2: the MSPLF (Main Street Priority Loan Facility)
In this option, eligible lenders extend new loans to eligible borrowers ranging in size from $500,000 to $25 million. The maximum size of this loan cannot exceed six times the Eligible Borrower’s adjusted 2019 earnings before interest, taxes, depreciation, and amortization when added to the borrower’s pre-crisis outstanding and undrawn available debt.
At the time of origination and at all times thereafter, the loan must take priority above all other loans or debt instruments that the borrower has, other than mortgage debt. Eligible borrowers may, at the time of origination of the loan, refinance existing debt owed to a lender that is not the lender for the Main Street Loan.
Type 3: the MSELF (Main Street Expanded Loan Facility)
With this option, lenders can increase an eligible borrower’s existing term loan. It is still a four-year term loan, but can range in size from $10 million to $200 million. The maximum size of the loan cannot exceed 35% of the borrowers existing outstanding and undrawn available debt, secured or unsecured. Conversely, when the loan size is added to the borrower’s existing outstanding and undrawn available debt, it must be less than six times the Eligible Borrower’s adjusted 2019 EBITDA. At the time of upsizing and at all times thereafter, the upsized tranche must take priority above all the borrower’s other loans or debt other than mortgage debt.
Still have questions? We highly encourage you to seek clarification through the Federal Reserve’s FAQ page on the monetary policy of the Main Street Program.
Need Help with Determining the Next Steps Financially for your Business?
Perry & Associates CPAs has multiple offices throughout the Mid-Ohio and Ohio Valleys and we are ready to help you navigate this complex lending program.
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St. Clairsville, OH