Since the signing of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) on March 27, many of us have paid an enormous amount of attention to the Small Business Association (SBA) Paycheck Protection Program (the PPP). While mid-sized and larger businesses do not qualify for PPP assistance, they are also feeling the same impacts of the COVID-19 crisis as small businesses. There is relief for mid-sized and larger businesses under the CARES Act in the form of two programs — the Main Street New Loan Facility (MSNLF) and the Main Street Expanded Loan Facility (MSELF).
The CARES Act authorizes the Treasury to provide up to $500 billion in loans or loan guarantees including programs specifically for targeted industries (passenger airlines, air cargo carriers and businesses critical to national security) and facilities to be established by the Federal Reserve (the Fed) to support lending to small- and medium-sized businesses. Only recently has that relief started to take shape.
The MSNLF will consist of newly written term loans and the MSELF of expansions of existing credit facilities for qualifying businesses. Both programs will run through commercial lenders which will originate the loans and then sell 95 percent of the loaned amount (or upsized tranches for MSELF loans) to the Fed. Based on what we know now, the MSNLF and MSELF programs should offer some assurances to banks lending into uncertain economic conditions. But their utility for borrowers is likely to be highly dependent on circumstances, including borrowers’ existing leverage and ability to retain or rehire their workforce.
The CARES Act directs the preparation and release of additional regulations including those related to the form and terms and conditions of these programs, but those additional regulations have not yet been published. The Fed has posted term sheets on its website for both programs. They also have an open request for comments that closes on Thursday, April 16, so we expect additional guidance to follow shortly thereafter.
Below is a brief outline of what is currently known about the eligibility criteria for borrowers, the loan terms and the strings attached to participation.
Borrowers must meet the following criteria to participate in either the MSNLF or the MSELF programs:
- Be a business that was “created or organized” in the U.S. or under the laws of the U.S., and have significant U.S. operations with a majority of its employees based in the U.S.;
- Not be in bankruptcy;
- Have not more than 10,000 employees OR not more than $2.5 billion in 2019 annual revenue if more than 10,000 employees; and
- Not already be participants in the Fed’s Primary Market Corporate Credit Facility Program and for MSNLF Borrowers, not be participants in the MSELF program.
The CARES Act appears to authorize programs for businesses with between 500 and 10,000 employees.1 However, the materials available from the Fed as of publication indicate that they will be available to all business with up to 10,000 employees, meaning that PPP borrowers would also be eligible for MSNLF and MSELF loans. Additionally, further interpretation of the “significant U.S. operations” requirement may be required to analyze whether certain cross-border businesses are eligible.
Much is yet to be learned about the terms under which both loan programs will be administered. However, the Fed’s term sheets are instructive and consistent with the CARES Act as to several key terms.
Each MSNLF loan and MSELF loan will have:
- An interest rate equal to the Secured Overnight Financing Rate + 250-400 basis points;
- Four-year maturity with amortization of principal and interest deferred for one year;
- A loan size calculated as follows:
- For MSNLF Loans: $1 million minimum up to the lesser of (a) $25 million, or (b) 4x the borrower’s 2019 EBITDA (including all committed but undrawn debt available to borrower); and
- For MSELF Loans: $1 million minimum up to the lesser of (a) $150 million, (b) 30 percent of the borrower’s existing and undrawn bank debt, or (c) 6x borrower’s 2019 EBITDA (including all committed but undrawn debt available to borrower);
- No prepayment penalties;
- Origination fee of 100 basis points of principal amount (upsized tranche amount for MSELF loans) payable by borrower to the lender; and
- Additional requirements apply for publicly traded companies including providing Treasury with a warrant or other equity interest.
Leverage limits are intended to limit the risk that the Fed is taking on but may make these loans unavailable to borrowers with significant debt loads, including some private equity portfolio companies. For those businesses on the margins, further guidance related to acceptable EBITDA calculations will be important. None has been issued to date. Further, no specific guidance has been issued regarding security requirements for either MSNLF or MSELF loans, but the CARES Act provides that Treasury must obtain a warrant (or other equity interest) or senior debt security from every borrower commensurate for the risk of making such loans or loan guarantees. The type of instrument that will be obtained will depend on the nature of the business of the borrower or loan guarantee recipient. Today’s press outlines the arrangements reached with the airline industry, including the size of the warrants.
In addition to those eligibility requirements outlined above, each MSNLF or MSELF borrower will be required to attest to certain requirements, some of which come from the CARES Act directly and some of which appear to reflect the forthcoming implementation regulations.
Each borrower will be required to certify:
- Compliance with the Taxpayer Protection Requirements of Section 4003(c) of the CARES Act, including:
- No share repurchases for the borrower or parent until 12 months after the loan or loan guarantee is no longer outstanding (except pursuant to a pre-existing contractual obligation);
- No dividend payments or other capital distributions on common stock until 12 months after the loan or loan guarantee is no longer outstanding; and
- Limitations on executive compensation.2
- Compliance with the employee retention requirements of Section 4003(c)(3)(D) of the CARES Act, including:
- Retention of at least 90 percent of the borrower’s workforce, at full compensation and benefits, until September 30, 2020;
- Restoration of at least 90 percent of its workforce that existed as of February 1,2020 to full compensation and benefits within four months of HHS terminating the COVID-19 public health emergency;
- No outsourcing or offshoring jobs until 24 months after the loan or loan guarantee is no longer outstanding; and
- Remaining neutral in CBA negotiations.
- That no MSNLF or MSELF funds will be used to repay existing loans or lines of credit (other than mandatory payments) — this includes existing portions of the MSELF loans and prohibits the accelerated payment of any debt other than the applicable MSNLF or MSELF loans;
- That the borrower will not cancel or reduce existing lines of credit; and
- That the borrower requires financing due to exigent COVID-19 circumstances.
We are still waiting for guidance on the specifics of employee retention conditions. The CARES Act requires borrowers to make a good faith certification that they will comply with the employee retention provisions of Section 4003(c), but the Fed’s posted term sheets appear to require borrowers to only “make a reasonable effort to maintain its payroll and retain its employees during the term.” Obviously these attestations will matter to borrowers facing an uncertain future and evaluating their borrowing options, so we hope to see them refined as the program details are rolled out.
Lane Powell’s Corporate, Securities and M&A and Finance & Banking Teams stand ready to help you navigate your business’ CARES Act options.
1 See Section 4003(c)(D)(i) “the Secretary shall endeavor to seek the implementation of a program or facility described in subsection (b)(4) that provides financing to banks and other lenders that make direct loans to eligible businesses including, to the extent practicable, nonprofit organizations, with between 500 and 10,000 employees.”
2 See Section 4004 of the CARES Act.