The worldwide Coronavirus Pandemic has thrown many businesses into a tailspin by disrupting workflow and creating a drastic decline in commerce for a wide range of industries. Businesses have been faced with the challenge of instituting and enforcing new operating policies and procedures that keep workers safe including stay-at-home work policies and many have had to reduce headcount in order to survive. These changes have created an ongoing disruption in the global economy and governments need to find ways to step in and try and limit the economic impact. Here in the US, one of the measures the Federal Reserve has come up with is the Main Street Lending Program.
This program is designed to help credit flow, keeping companies and organizations in business. These companies need loans now to help maintain their operations until they have either recovered their business or have adapted to the pandemics impact.
Below, we look at what it involves, how to obtain eligibility and other essential elements to consider.
What Is the Main Street Lending Program?
The Main Street Lending Program refers to a program established by the Federal Reserve for small and medium-sized businesses and nonprofit organizations that were previously in an excellent financial condition before the Covid-19 pandemic. The program operates through 5 facilities, namely the Main Street New Loan Facility (MSNLF), the Main Street Priority Loan Facility (MSPLF), the Main Street Expanded Loan Facility (MSELF), the Nonprofit Organization New Loan Facility (NONLF) and the Nonprofit Organization Expanded Loan Facility (NOELF).
Loan Facilities Currently in Operation
As of July 28, 2020, the loan facilities in operation are the MSNLF, MSPLF and MSELF. These listed loan facilities can purchase participants in eligible loans that have been submitted by qualified lenders through the Main Street Lender Portal.
The NONLF and the NOELF are not yet in operation and will be available for use once the Federal Reserve comes up with the necessary frameworks.
Loan Structures in the Main Street Lending Program
All loans in the Main Street Lending Program have:
- A 5-year maturity period.
- A deferral of principal payments for 2 years amortized at 15% for the third and fourth year and 70% for the fourth year before maturity occurs in the fifth year.
- An interest rate LIBOR (1 or 3 months) +3% and deferral of interest payments for 1 year.
More specifically, under the MSNLF, the Fed can purchase unsecured term loans originated on or after April 24, 2020. Here, loans purchased fall between $250,000 and $35 million or a value that should not exceed 4 times the 2019 EBITDA when added to current debt.
For the MSPLF, the Federal Reserve can purchase unsecured term loans originated on or after April 24, 2020. The values of loans are between $250,000 and $50 million or an amount that does not exceed 6 times the 2019 EBITDA when added to the current debt.
The MSELF, on the other hand, can purchase term loans originated before April 24, 2020. The value of the loans here falls between $10 million and $300 million or an amount that does not exceed 6 times the 2019 EBITDA when added to the outstanding and available debt.
Next is the NOELF that offers loans between $10 million and $300 million or the borrower’s average of the 2019 revenue.
Lastly, the NONLF has a loan size of between $250,000 and $35 million or the borrower’s average of the 2019 revenue.
How Can Borrowers Apply for the Main Street Lending Program?
Borrowers in small and medium-size businesses can contact eligible lenders through the Federal Reserve Bank of Boston Information for Borrowers that helps them find registered lenders to advance the loan amounts that they are looking for.
But before that, first, check your eligibility criteria for businesses and nonprofit organizations as outlined below.
Eligibility for Businesses in the Main Street Lending Program
- The business should have been established before March 13, 2020.
- The business should have had annual revenue of less than $5 billion in 2019.
- A workforce of 15,000 employees or less as of 2019.
- The business must be eligible to receive the Paycheck Protection Plan.
- They must have a majority of the United States’ employees or primarily be operated in the United States.
- The business must not have received support from the Corona Virus Economic Stabilization Act of 2020.
Public company issuers have also not been left behind and are eligible for the Main Street Lending Program. However, they need to follow restrictions related to the compensation, stock repurchase, and dividends for lending programs under the CARES Act. Some restrictions fall under bonuses for employees who received more than $3 million in total compensation in 2019. S-corporations and other tax pass-through entities can also continue their dividend and capital distributions but only to a reasonable extent that is necessary to cover the owner’s tax obligation according to the organization’s earnings.
Documents Required During a Loan Participation Sale to the Main Street SPV
Before loan participation is sold to the Main Street SPV (Special Purpose Vehicle), eligible lenders and borrowers need to present their documents for approval. These include;
- The loan participation agreement. This consists of two parts, which are the transaction-specific terms and the standard terms and conditions.
- The service agreement which the lender needs to first complete, sign and submit to the servicing agreement.
- The assignment in blank document, signed by both the eligible lender and the eligible borrower.
- The co-lender agreement, consisting of the transactions specific terms as well as the terms and conditions document.
- The facility transaction specific lender certifications and covenants.
- The facility borrower certifications and covenants.
- The loan document checklist.
With the above requirements, small and medium businesses can rest assured of continued business operations. To view updated information of the Main Street Lending Program visit our site or the Federal Reserve site for timely updates.