Main Street Lending Program: Initial Overview of Terms, Required Certifications, and Restrictions

Read: Updated Main Street Lending Program Overview (April 30, 2020) 

KEY TAKEAWAYS

1. The Main Street Lending Program will allow Eligible Lenders to either make New Loans or extend Existing Loans to Eligible Borrowers who have no more than 10,000 employees or no more than $2.5 billion in 2019 annual revenues. 
2. Eligible Loans will carry a 4 -year term, 12-month deferment for principal and interest, adjustable rate of SOFR + 250-400 basis points, and no prepayment penalty. New Loans will be capped at $25M and extensions on Existing Loans will be capped at $150M. 
3. For one year after the Eligible Loan is no longer outstanding, the Eligible Borrower will have to agree to: prohibitions on stock buyback, paying dividends, making capital distributions, and limitations on executive compensation.

On April 9, 2020, the initial terms of the Main Street Lending Program (the “Program”) were announced. Eligible Lenders may originate New Loans or extend Existing Loans to Eligible Borrowers. This client alert provides a general overview of terms, required certifications and restrictions announced thus far. Further guidance and regulations are expected to be published prior to the Program becoming available to borrowers. This client alert will be updated accordingly. 

Eligible Lenders are U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies.
 
Eligible Borrowers are businesses with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues. Eligible Borrowers may use the Program for both a New Loan and an Existing Loan and also may not participate in Primary Market Corporate Credit Facility. However, Eligible Borrowers are not precluded by participation in the PPP Loan. 

Eligible Loans are unsecured term loans made by an Eligible Lender(s) to an Eligible Borrower that were either: 1) originated on or after April 8, 2020 (“New Loan”) or 2) originated before April 8, 2020 (“Existing Loan), provided that the loans have the following features: 

• 4 year maturity
• Amortization of principal and interest deferred for one year
• Adjustable rate of SOFR (Secured Overnight Financing Rate) + 250-400 basis points
• Minimum loan size of $1 million
• Prepayment permitted without penalty 
• Program does not provide for forgiveness of Eligible Loans
• Maximum loan size (New Loan) that is the lesser of:

• $25 million or
• Eligible Loan Amount plus Eligible Borrower’s existing outstanding and committed but undrawn debt does not exceed four times Eligible Borrower’s 2019 EBITDA

• Maximum loan size (Existing Loan) that is the lesser of:

• $150 million;
• 30% of the Eligible Borrower’s existing outstanding and committed but undrawn bank debt; or
• Eligible Loan Amount plus Eligible Borrower’s existing outstanding and committed but undrawn debt does not exceed six times Eligible Borrower’s 2019 EBITDA

Attestations under Main Street Loan Program: 

The following attestations will be required with respect to each Eligible Loan: 

• The Eligible Lender must attest that the proceeds of the Eligible Loan will not be used to repay or refinance pre-existing loans or lines of credit made by the Eligible Lender to the Eligible Borrower. 
• The Eligible Borrower must commit to refrain from using the proceeds of the Eligible Loan to repay other loan balances. The Eligible Borrower must commit to refrain from repaying other debt of equal or lower priority, with the exception of mandatory principal payments, unless the Eligible Borrower has first repaid the Eligible Loan in full.
• The Eligible Lender must attest that it will not cancel or reduce any existing lines of credit outstanding to the Eligible Borrower. 
• The Eligible Borrower must attest that it will not seek to cancel or reduce any of its outstanding lines of credit with the Eligible Lender or any other lender. 
• The Eligible Borrower must attest that it requires financing due to the exigent circumstances presented by the COVID-19 pandemic, and that, using the proceeds of the Eligible Loan, it will make reasonable efforts to maintain its payroll and retain its employees during the term of the Eligible Loan.
• The Eligible Borrower must attest that the Eligible Loan does not exceed an amount that, when added to the Eligible Borrower’s existing outstanding and committed but undrawn debt, would cause the total amount to exceed four times the Eligible Borrower’s 2019 EBITDA. 
• The Eligible Borrower must attest that it will follow compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act.  
• Eligible Lenders and Eligible Borrowers will each be required to certify that the entity is eligible to participate in the Facility, including in light of the prohibition against conflicts of interest in section 4019(b) of the CARES Act.

Restrictions under the CARES Act: 

• That for 12 months after the Eligible Loan is no longer outstanding, the Eligible Borrower will not repurchase an equity security of the Eligible Borrower, or any parent company of the Eligible Borrower, if said equity security was listed on a national stock exchange while the Eligible Loan was outstanding, except to the extent required by a contractual obligation in effect prior to March 27, 2020;
• That for 12 months after the Eligible Loan is no longer outstanding, the Eligible Borrower will not pay dividends or make other capital distributions with respect to the common stock of the Eligible Borrower;
• That it will comply with the following compensation restrictions, as set forth in Section 4004:  

• Two tiers of executive compensation (including salary, stock, and bonuses) restrictions for a period of time that extends one year beyond the term of the Eligible Loan. 
• Officers or employees who received more than $425,000 in total compensation in 2019 cannot receive a pay raise in 2020, and cannot receive severance pay or other benefits that are more than twice their 2019 compensation. 
• Officers or employees who received more than $3 million in total compensation in 2019 cannot receive total compensation in 2020 in excess of (i) $3 million plus (ii) 50% of the excess over $3 million said officer or employee received in 2019.

Certifications under the CARES Act: 

Under Section 4003, an Eligible Borrower must make a good-faith certification that:

• The uncertainty of economic conditions as of the date of the application makes necessary the Eligible Loan request to support the ongoing operations of the Eligible Borrower; 
• Proceeds of the Eligible Loan will be used to retain at least 90 percent of the Eligible Borrower’s workforce, at full compensation and benefits, until September 30, 2020; 
• Eligible Borrower intends to restore not less than 90 percent of the workforce of the Eligible Borrower that existed as of February 1, 2020, and to restore all compensation and benefits to the workers of the Eligible Borrower no later than 4 months after termination of emergency declaration for COVID–19;
• Eligible Borrower is an entity or business that is domiciled in the United States with significant operations and employees located in the United States; 
• Eligible Borrower is not a debtor in a bankruptcy proceeding; 
• Eligible Borrower is created or organized in the United States or under the laws of the United States and has significant operations in and a majority of its employees based in the United States;
• Eligible Borrower will not pay dividends with respect to the common stock of the Eligible Borrower, or repurchase an equity security that is listed on a national securities exchange of the Eligible Borrower or any parent company of the Eligible Borrower while the Eligible Loan is outstanding, except to the extent required under a contractual obligation that is in effect as of the date of enactment of this Act;
• Eligible Borrower will not outsource or offshore jobs for the term of the Eligible Loan and for two (2) years after completing repayment of the Eligible Loan; 
• Eligible Borrower will not abrogate existing collective bargaining agreements for the term of the Eligible Loan and for two (2) years after completing repayment of the Eligible Loan; and
• Eligible Borrower will remain neutral in any union organizing effort for the term of the Eligible Loan.