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Federal Reserve Announces Changes to the Main Street Lending Program

Joseph Most, J.D.    and Ken Maeng, J.D.

5.19.20 | Client Alert – COVID-19 Update

On April 30, 2020, the Federal Reserve announced changes to its Main Street Lending Program (Program) originally released in draft form on April 9, 20201. The Program reduced the minimum loan amount for all loans to $500,000 and increased the maximum size of eligible companies to 15,000 employees or up to $5 billion in 2019 annual revenue.

Companies that were in sound financial condition prior to the onset of the COVID-19 pandemic may now select among the following three facilities:

  1. Main Street New Loan Facility (MSNLF),
  2. Main Street Priority Loan Facility (MSPLF), and
  3. Main Street Expanded Loan Facility (MSELF).

All use the same eligibility criteria and provide many of the same features, including the same maturity, interest rate, one-year deferral of principal and interest, and ability of the borrower to prepay without penalty.

Other eligibility criteria are generally consistent among the three loan options, as outlined below:

Eligible Businesses

  • Includes for profit partnerships, LLC’s, corporations, associations, trusts, cooperatives, JV’s2 and tribal business concerns
  • The Business must have been established prior to March 13, 2020.
  • The Business must not be an Ineligible Business (listed below).
  • The Business must meet at least one of the following two conditions:

1. The Business has 15,000 employees or fewer, or
2. The Business has 2019 annual revenues of $5 billion or less.

  • The Business must be a U.S. Business.
  • The Business may only participate in one of the Main Street facilities (MSNLF, MSPLF, or MSELF) and must not also participate in the Primary Market Corporate Credit Facility (PMCCF)3.
  • The Business must not have received specific support pursuant to section 4003(b)(1)-(3) of the Coronavirus Economic Stabilization Act of 2020 (CARES Act)4.
  • The Business must be able to make all of the certifications and covenants required under the Program.

In addition to the above criteria, the MSELF requires that the loan facilities existed on or before April 24, 2020 and have a remaining maturity of at least 18 months.

Ineligible Businesses 5

  • Generally, certain passive real estate businesses, including:
    • Passive businesses owned by developers and landlord that do not actively use or occupy the assets acquired or improved by the loan proceeds;
    • Businesses engaged in subdividing real estate;
    • Business that lease land for cell phone tower;
    • Businesses that enter into a management agreement with a third party that give the management company sole discretion to manage the operations; and
    • Apartment buildings
    • However, a passive real estate business that leases real or personal property to an operating company for use in the operating company’s business may be eligible for one of the facilities. If approved for one of the facilities, such passive real estate businesses’ use of the proceeds is subject to certain conditions.
  • Lending institutions
  • Businesses located in a foreign country
  • Life insurance companies
  • Businesses that defaulted on a federal loan or federally assisted financing, including the PPP
  • Speculative businesses (private equity funds and hedge funds)

Click here for a chart which outlines the key terms of each of the three loans.

Final Notes

The Federal Reserve Board has not yet specified when loans will become available. However, the Special Purpose Vehicle (SPV) will stop purchasing participations in Eligible Loans on September 30, 2020 unless the Board and the Treasury Department extend the Facility.

Businesses interested in applying will submit an application to an eligible lender. Unlike the PPP, lenders are expected to apply their own underwriting standards in evaluating the financial condition and creditworthiness of a potential borrower.

For more information on this topic or any other matter related to the COVID-19 pandemic, please contact your Berdon Advisor.

Berdon LLP New York Accountants

1 For initial coverage of the Main Street Lending Program, see Federal Reserve Creates Small and Mid-Sized Company Loan Facilities Under the CARES Act

2 A JV may not have more than 49% participation by foreign business entities.

3 The PMCCF is one of the new relief provisions provided by CARES Act. It is designed to help businesses get quick access to cash by encouraging new corporate bond and loan issuances. For more information on the PMCCF, see Primary Market Corporate Credit Facility

4 Section 4003(b)(1)-(3) generally apply to air carriers and businesses critical to maintaining national security.

5 The following businesses are also ineligible: pyramid sale distribution plans; businesses that derive more than 1/3 of gross annual revenue from legal gambling activities; businesses engaged in illegal activity; certain private clubs that limit membership; certain loan packagers; businesses with an associate who is incarcerated, on probation, on parole, or has been indicted for certain crimes; businesses in which the lender or an associate owns an equity interest; businesses that have a sexual nature; and businesses engaged in political or lobbying activities.