About the Main Street Lending Program

Madeline McElhanon Commentary

About the Main Street Lending Program

As a component of the Coronavirus Aid, Relief & Economic Security Act, the Federal Reserve established the Main Street Lending Program to provide up to $600 billion in financing to businesses and nonprofit organizations negatively impacted by the onset of the COVID-19 pandemic.

Pursuant to the MSLP, banks may originate a loan and sell a 95% participation to a special purpose vehicle of the Federal Reserve Bank of Boston. After the participation, the bank retains 5% of the credit risk on the loan. This process occurs through the Fed’s MSLP portal, where banks must register as an eligible lender, provide information on the proposed borrower and loan, and submit a participation request consisting of both the bank’s standard loan documents and specific MSLP documents. The MSLP is currently set to end Dec. 31.

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In order to qualify, borrowers must meet certain eligibility thresholds. Among the requirements, borrowers must have been an established U.S. company before March 13, 2020; have fewer than 15,000 employees or less than $5 billion in 2019 revenue; must not be considered an ineligible business under the Paycheck Protection Program; and must not have received certain identified support under the CARES Act. However, borrowers who received PPP loans are still eligible to participate in the MSLP.

In addition to borrower eligibility, the loan itself must fit within the parameters of the MSLP. Loans must comply with one of five operating facilities, three of which are available to for-profit business borrowers. All three of these facilities have a five-year loan term with interest payments deferred one year and principal payments deferred two years. Fifteen percent of principal is due in years three and four with a balloon payment of the remaining 70% due at maturity.

The interest rate is either one-month or three-month London Interbank Offered Rate (LIBOR) plus 300 basis points. Banks may charge an origination fee of up to 75 or 100 basis points depending on the facility. The Fed charges a transaction fee of 75 or 100 basis points, which many lenders will require the borrower to pay. The bank will also receive a yearly 25 basis point loan servicing fee from the special purpose vehicle.

The Main Street New Loan Facility provides for a minimum loan amount of $100,000 with a maximum of $35 million or four times the borrower’s 2019 EBITDA netted against qualifying debt. The Main Street Priority Loan Facility also provides for a minimum loan amount of $100,000 but the maximum amount is $50 million. For MSPLF, the loan amount is limited to six times the borrower’s 2019 EBITDA netted against qualifying debt.

The Main Street Expanded Loan Facility requires a pre-existing loan between the borrower and lender. This facility allows for a portion of the underlying loan to be “upsized” to create a larger principal amount. The loan range for MSELF is $10 million to $300 million. Again, the maximum loan amount is also limited by six times the borrower’s 2019 EBITDA. The underlying loan must be between the same borrower and lender, must have been originated on or before April 24, 2020, and must have at least 18 months remaining until maturity.

Two additional facilities are available for nonprofit organizations. The Nonprofit Organization New Loan Facility and the Nonprofit Organization Expanded Loan Facility have an additional set of qualifications relevant to nonprofit borrowers.

Since its inception, the MSLP’s term sheets, form documents and frequently asked questions have been periodically revised. On Oct. 30, for instance, guidance was issued to reduce the minimum loan amount on MSNLF and MSPLF from $250,000 down to the current $100,000. MSLP fees were adjusted for these smaller loan sizes. The guidance also amended the treatment of PPP loans and now provides that PPP loans up to $2 million will not be considered as debt when calculating a borrower’s maximum loan amount.

As of Oct. 30, the Fed had made almost 400 loans totaling $3.7 billion under the various facilities. Given the $600 billion MSLP capacity, relatively few banks have participated. However, smaller community banks, including many here in Arkansas, have been the most active underwriters of the MSLP and the recent accommodations for smaller borrowers may further increase participation in the MSLP’s final months.

Madeline O. McElhanon is an associate in the Finance & Commercial Transactions Practice Group at Friday Eldredge & Clark LLP in Little Rock.