CARES Act Insights: Federal Reserve Further Expands Terms of Main Street Lending Program to Appeal to More Small- and Medium-Sized Businesses

Miller & Martin PLLC Alerts | June 10, 2020

Amidst the backdrop of a looming launch date for its Main Street Lending Program (the “Program”) and lingering concerns over whether the terms of Program loans will deter small- and medium-sized businesses from participating, the Federal Reserve has again expanded the scope of the Program.  The $600 billion Program is intended as a lifeline to businesses harmed by the coronavirus pandemic which have not otherwise received support from the already existing Paycheck Protection Program (“PPP”) or other programs created under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) or are otherwise constrained by the credit markets.

In support of the Program, the Federal Reserve Bank of Boston has already established a special purpose vehicle (“SPV”) that will purchase participations in eligible loans (consisting of new loans, priority new loans, and expanded loans of additional funds under already existing borrower credit facilities), with lenders retaining a 5% interest in the loans.  Eligible borrowers are U.S. for-profit businesses with 15,000 or fewer employees or up to $5 billion in 2019 revenues.  Please see Miller & Martin’s prior client alerts for commentary on the Program and more details regarding the loan terms and covenants applicable to lenders and borrowers.

In its press release issued June 8, 2020, and in revised term sheets which accompanied the release, the Federal Reserve made the following adjustments to the eligible loan terms:

  • The minimum principal amounts for new loans and priority new loans have been lowered from $500,000 to $250,000. The minimum principal amount for expanded loans remains at $10 million.
  • The principal amount of each loan type is determined by a pro forma leverage test applied to the outstanding indebtedness of the borrower subject to an absolute maximum amount, which for new loans has been increased to $35 million (up from the prior amount of $25 million), for priority new loans has been increased to $50 million (up from $25 million), and for expanded loans has been increased to $300 million (up from $200 million).

  • The term of all loans has been increased from 4 years to 5 years.

  • Principal payments are now deferred for 2 years (up from the previous deferral period of 1 year), though interest payments remain deferred for a one-year period.

  • Amortization of new loans following the deferral period will now be back-end weighted, with 15% of principal due at the end of years three and four and 70% due at maturity (this schedule now matches the amortization of priority new loans and expanded loans).

  • For each loan, the lender retains a 5% interest in the loan with the SPV purchasing the remaining 95% (previously, lenders were required to retain a 15% interest in priority new loans).

In its press release, the Federal Reserve also indicated that the first step in launching the Program will be registering those eligible lenders who wish to participate in the Program, with lenders encouraged thereafter to “immediately” commence loan originations and with the Fed’s expectation for the SPV to begin purchasing participations “shortly” thereafter.

Interested lenders should access detailed information and forms regarding the Program available via the “lenders page” on the Federal Reserve’s website, though we note that many of the forms of legal agreements currently included on the lenders page remain to be updated to reflect the expanded terms noted above.

The Federal Reserve also has established a “borrowers page” on its website, which contains information that businesses should reference in determining their eligibility as borrowers under the Program and whether the terms and requirements of the Program loans are suitable for their respective businesses.

For more information about the ongoing developments related to the COVID-19 pandemic, please visit Miller & Martin's Coronavirus Resources.