Updated term sheets and FAQs released by the Federal Reserve (Fed) for its forthcoming Main Street Loan Program (MSLP) further expands the pool of potential borrowers and loosens some of the requirements all to make the loan products more attractive to borrowers and lenders alike.
The new term sheets for the Main Street New Loan Facility (MSNLF), Main Street Priority Loan Facility (MSPLF) and Main Street Expanded Loan Facility (MSELF) come hot on the heels of the Fed’s release of much of the nuts and bolts of the program on May 27 (which we wrote about here). They also represent the second such expansion of the program from its initial disclosure in March.
The updated term sheets represent a continuation of the trend, as the accompanying press release, “Federal Reserve Board expands its Main Street Lending Program to allow more small and medium-sized businesses to be able to receive support,” is not at all shy about it. Here are some of the changes:
Minimum loan sizes have been reduced to $250k from $500k for MSNLF and MSPLF programs allowing all borrowers a larger window of eligibility. This is the second such reduction for minimum loan amounts, now at one-quarter of the initial proposed minimum of $1M.
Maximum loan amounts have been raised to $35M for the MSNLF, $50M for the MSPLF and $300M for the MSELF. Also, the maximum amount of MSELF loans is now (i) the lesser of $300M or (ii) an amount that when added to the borrower’s existing outstanding and undrawn available debt, does not exceed six times the borrower’s adjusted 2019 EBITDA. The third possible limiting factor — 35 percent of the borrower’s existing outstanding and undrawn available debt that is pari passu in priority with the MSELF Upsized Tranche (and underlying loan) and equivalent in secured status (i.e., secured or unsecured) — has been removed.
For all MSLP loans, repayment terms have been stretched to five years with interest payments delayed to the second year and principal payments delayed until the end of the third year. Interest for the first year will be capitalized, and after that, will be payable as set out in the loan documents. Additionally, the amortization schedule for MSNLF loans has been revised to mirror those previously offered for the MSPLF and the MSELF, i.e. providing for a 15 percent annual payment at the end of years three and four with a 70 percent balloon payment payable at maturity at the end of year five. This should give borrowers more runway to recover from COVID-19 and allow those that are healthier at the end of five years the possibility of refinancing with more certainty for lenders that the worst is behind them.
The updated FAQs include mostly technical guidance for lenders preparing loan documents. One exception that should be of interest to borrowers is new FAQ H.10 which provides guidance on how borrowers should prepare financial records in connection with the borrower required certifications and covenants. For purposes of the certifications and covenants, GAAP borrowers should use GAAP financials; borrows with audited financials should use their audited financials; and those without should use their most recent audited or reviewed financials or those that were prepared for the purposes of filing taxes. It is not clear if this same set of financial reporting standards applies to the periodic reporting requirements or to the eligibility (and eligible loan size) determination in accordance with FAQ E.4. Because loan sizing is tied to EBITDA this is an important question that appears to be open given FAQ E.4’s maintenance of the GAAP audited financial standards requirement in subsection (1). This appears to create the possibility that non-GAAP borrowers are required to use subsection (2) which relies on annual receipts for fiscal year 2019 as reported to the IRS for purposes of determining eligibility.
These revised documents are released against a backdrop of borrowers and lenders gearing up for participation in the MSLP program, as well as rising uncertainty regarding the utility of its products. News outlets and some advocacy groups have been critical of the MSLP, arguing that it does not go far enough to provide viable options to borrowers. While the MSLP is having to live in the shadow of the PPP program’s increasingly forgivable loans, it appears the Fed may be trying to catch up and borrowers and lenders alike will benefit.
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