On April 9, the Federal Reserve announced the Main Street Lending Program, the latest in a series of liquidity commitments to bolster the economy during the coronavirus pandemic, particularly for small and medium-size businesses
The program is backstopped by $75 billion in equity investment that will provide up to $600 billion in liquidity commitments by the Federal Reserve to qualifying borrowers.
Within moments of this announcement, many lenders began to examine the term sheets published by the Federal Reserve. While some answers were provided, further details are needed.
What is known
The special purpose vehicle (SPV) will commit to purchasing 95% of loans made by eligible lenders — U.S. insured depository institutions, U.S. bank holding companies and U.S. savings and loan holding companies — that will hold 5% of each eligible loan.
Eligibility is based on firms with revenues of less than $2.5 billion in 2019, or firms with up to 10,000 employees. Each firm must be a business that is created or organized in the United States with significant operations and a majority of its employees in the U.S.
Loan terms
- Four-year maturity.
- Interest at an adjustable rate of SOFR plus 250-400 basis points.
- Minimum size of $1 million.
- The Main Street New Loan Facility is for new loans established after April 8. Maximum size will be the lesser of $25 million or an amount that, when added to the borrower’s existing and committed but undrawn debt, does not exceed four times the borrower’s 2019 EBITDA.
- The Main Street Expanded Loan Facility is for existing term loans established before April 8. Maximum loan size will be the lesser of $150 million, 30% of the borrower’s existing outstanding and committed but undrawn bank debt, or an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed six times that borrower’s 2019 EBITDA
- Amortization of principal and interest payments will be deferred for one year.
- Prepayment will be permitted without penalty.
- New loans originated under the program are unsecured.
- Loans are not guaranteed.
Loan fees
- Borrowers will pay lenders an origination fee equal to 100 basis points of the principal amount of the eligible loan.
- Lender will pay the SPV, under the program, a facility fee of 100 basis points of the principal amount of the loan participation purchased by the SPV. Lenders may require the borrower to pay this fee.
- SPV will pay an eligible lender 25 basis points of the principal amount of its participation interest in the eligible loan for loan servicing.
Unanswered questions
Despite the detail in the term sheets, there are still some unanswered questions. Although the list of questions will vary by lender and its known borrower base, some of the most common questions being asked are:
- Are there restrictions on what types of businesses or other entities that can apply?
- Will there be specific criteria for underwriting these loans, or do we use our institution’s standard underwriting requirements?
- Will there be a formula to determine the size of a loan?
- What is the recourse to our institution for the 95% that is sold to the SPV?
- Will there be further clarity on how loan proceeds are to be used by the borrower?
- Are new loans required to be unsecured or may loans be collateralized or cross-collateralized under the existing relationship?
- How do I handle maturities on current operating lines with my borrower without jeopardizing the borrower’s participation in this program?
- How do restrictions on distributions affect my pass-through clients that may need distributions to pay taxes?
As the Federal Reserve indicated in its release of information surrounding the program, the financing needs will vary widely dependent on the organization. This is why the Federal Reserve is seeking comment through April 16 based on the information that has been released.
Next steps for lenders
- Identify potential borrowers. Connect with and identify those firms that will need the Main Street Lending Program funds.
- Assess their needs. As each business may be at a different point with liquidity and cash needs, it may mean that banks need to assess borrower needs to ensure that banks can direct funding where it is needed immediately versus if a business may have sufficient cash for now.
The takeaway
While we expect further clarity to be provided as the Federal Reserve reviews feedback submissions, it will be important for lenders to start preparing now as further information is provided on what is expected of not only the borrower but also the lender.
For more information on how the coronavirus is affecting midsize businesses, please visit the RSM Coronavirus Resource Center
