Menu
Get In Touch
Share

Legal Articles

Main Street Lending Program Overview for Nonprofits and For-Profit Businesses (updated 7/29/2020)

July 29, 2020

Overview

The Federal Reserve Bank of Boston announced on July 6, 2020, that the Main Street Lending Program (“Main Street Program” or “Program”) is now fully operational and ready to purchase participation in eligible loans that are submitted to the Program by registered lenders. This Program was created to provide up to $600 billion in liquidity to eligible lenders that make direct loans to eligible businesses (generally speaking, U.S. companies with 15,000 or fewer employees or 2019 annual revenues of $5 billion or less). The Program is intended to enhance support for small and midsized businesses in good financial standing before the COVID-19 crisis that now need loans to help maintain operations until their operations recover from the economic downturn.

On July 17, 2020, the Federal Reserve announced two new loan options under the Program to provide greater access to credit for nonprofit organizations such as educational institutions, hospitals, and social service organizations. Among other requirements, nonprofits seeking loans through the Program must have been operating for at least 5 years, have at least 10 employees, and have an endowment of no more than $3 billion. 

Differences between the Main Street Program and Other Federal Programs Established in the CARES Act to Aid Businesses during the COVID-19 Pandemic

Like the Paycheck Protection Program (“PPP”) overseen by the Small Business Administration and the Federal Reserve’s Primary Market Corporate Credit Facility (“PMCCF”), the Main Street Program was established to support companies adversely affected by the COVID-19 pandemic. Each of the three federal programs aims to provide liquidity to companies of different sizes. Below are descriptions of the types of companies each program is focused on assisting.

  • PPP: The PPP supports the payroll and operations of small businesses through the issuance of government-guaranteed loans that include a forgiveness feature for qualifying borrowers.
  • Main Street Program: The Federal Reserve designed the Main Street Program to support small and mid-sized businesses and nonprofits that were unable to access the PPP or that require additional financial support after receiving a PPP loan. Unlike PPP loans, loans issued under the Main Street Program are not forgivable.
  • PMCCF: The Federal Reserve established the PMCCF to support large companies through the purchase of eligible corporate bonds from, and lending through syndicated loans to, large companies. Unlike PPP loans, PMCCF loans are not forgivable.

FOR-PROFIT BUSINESSES

Overview of the Main Street Program

The Main Street Program for for-profit businesses operates through three facilities: the Main Street New Loan Facility (“MSNLF”), the Main Street Priority Loan Facility (“MSPLF”), and the Main Street Expanded Loan Facility (“MSELF”). All three facilities use the same lender and borrower eligibility criteria, and have many of the same features, including the same maturity (five years), interest rate (LIBOR plus 3%), deferral of principal for two years, deferral of interest for one year, and the ability of the borrower to prepay loans without penalty. Below are brief summaries of the distinct features of each loan facility.

  • MSNLF: Under the MSNLF, eligible lenders extend loans to eligible borrowers with such loans ranging in size from $250,000 to $35 million. The maximum size of a loan made in connection with the MSNLF cannot, when added to the borrower’s outstanding debt and undrawn available debt, exceed four times the eligible borrower’s adjusted 2019 earnings before interest, taxes, depreciation, and amortization (“EBITDA”). The MSNLF loan must not be, at the time of origination or at any time during the term of the loan, contractually subordinated in terms of priority to any of the borrower’s other loans or debt instruments. Additional information about the unique features of MSNLF loans is provided in the MSNLF term sheet.
  • MSPLF: Under the MSPLF, eligible lenders extend new five-year term loans to eligible borrowers with such loans ranging in size from $250,000 to $50 million. The maximum size of a loan made in connection with the MSPLF cannot, when added to the borrower’s outstanding debt and undrawn available debt, exceed six times the borrower’s adjusted 2019 EBITDA (compared with four times adjusted EBITDA for MSNLF loans). At the time of origination and at all times thereafter, the MSPLF loan must be senior to or on equal footing (pari passu) with, in terms of priority and security, the borrower’s other loans or debt instruments, other than mortgage debt. Eligible borrowers may, at the time of origination of the MSPLF loan, refinance existing debt owed by the borrower to a lender that is not the lender eligible to issue the MSPLF loan. Additional information about the unique features of the MSPLF loans is provided in the MSPLF term sheet.
  • MSELF: Under the MSELF, eligible lenders increase (or “upsize”) an eligible borrower’s existing term loan or revolving credit facility. The upsized tranche is a five-year term loan ranging in size from $10 million to $300 million. The maximum size of a loan made in connection with the MSELF cannot, when added to the borrower’s existing outstanding and undrawn available debt, exceed six times the borrower’s adjusted 2019 EBITDA (similar adjusted EBITDA requirement as MSPLF loans). At the time of upsizing, and at all times thereafter, the upsized tranche must be senior to or on equal footing with (pari passu), in terms of priority and security, the borrower’s other loans or debt instruments, other than mortgage debt. Additional information about the unique features of the MSELF loans is provided in the MSELF term sheet.

Depending on the type of Main Street Loan, eligible banks originating Main Street Program loans will retain a 5% share, selling the remaining 95% to the Main Street facility, which will purchase up to $600 billion of loans. Firms seeking Main Street Loans must commit to make commercially reasonable efforts to maintain payroll and retain workers, in light of the company’s capacities, the economic environment, the company’s available resources, and the business need for labor. Borrowers that have already laid off or furloughed workers as a result of the disruptions from COVID-19 are eligible to apply for Main Street Loans.

Borrowers must also follow compensation, stock repurchase, and dividend restrictions that apply to direct loan programs under the CARES Act. Businesses classified as S corporations or other tax pass-through entities may make distributions to the extent such distributions are reasonably required to cover owners’ tax obligations with respect to the business’s earnings. Borrowers that have taken advantage of the PPP may also take out Main Street Loans.

The Federal Reserve and the Treasury recognize that businesses vary widely in their financing needs, particularly at this time, and, as the Program is being finalized, will continue to seek input from lenders, borrowers, and other stakeholders to ensure the Program supports the economy as effectively and efficiently as possible while also safeguarding taxpayer funds.

Eligibility Requirements for For-Profit Businesses to Participate

The borrower eligibility criteria are the same for each of the Main Street Program facilities. A business that has received a PPP loan, or that has affiliates that have received a PPP loan, is permitted to borrow under the Main Street Program provided that the borrower meets all eligibility criteria. Below is a summary of the key Main Street Program borrower eligibility criteria.

  • The business must have been established prior to March 13, 2020. Businesses seeking loans under the Main Street Program must have been formed prior to March 13, 2020, under the laws of the United States, one of the states, the District of Columbia, any of the territories and possessions of the United States, or an Indian tribal government. A “business” must be a legally formed entity that is organized for profit as a partnership, a limited liability company, a corporation, an association, a trust, a cooperative, a joint venture with no more than 49% participation by foreign business entities, or a tribal business concern.

To be eligible for the Program, a tribal business concern must be either (i) wholly owned by one or more Indian tribal governments, or by a corporation that is wholly owned by one or more Indian tribal governments, or (ii) owned in part by one or more Indian tribal governments, or by a corporation that is wholly owned by one or more Indian tribal governments, if all other owners are either U.S. citizens or businesses.

  • The business must not be an ineligible business. The Federal Reserve will deem businesses ineligible based on the Small Business Administration’s ineligibility criteria, as set forth in 13 CFR 120.110(b)-(j), (m)-(s), and as this criteria has been modified and amended by the Small Business Administration for purposes of the Paycheck Protection Program on or before April 24, 2020. Such modifications include interim final rules available at 85 Fed. Reg. 20811, 85 Fed. Reg. 21747, and 85 Fed. Reg. 23450. The Federal Reserve may further modify the application of these eligibility restrictions to the Main Street Lending Program.
  • The business must meet one of two conditions tied to either employee head count or annual revenues. Eligible borrowers must either (i) have 15,000 employees or fewer or (ii) have had 2019 annual revenues of $5 billion or less. Borrowers must meet at least one of these conditions, but are not required to meet both. To determine these figures, the borrower must aggregate its employees and revenue figures with the employees and revenues of the borrower’s affiliates.
  • The business must be a U.S. business. Only businesses created or organized in the United States or under the laws of the United States with significant operations in and a majority of their employees based in the United States are eligible.
  • The business may only participate in one of the Main Street facilities(MSNLF, MSPLF, or MSELF) and must not also participate in the PMCCF.
  • The business must not have received specific support pursuant to the Coronavirus Economic Stabilization Act of 2020(Subtitle A of Title IV of the CARES Act). A business is not eligible if it has received support pursuant to Section 4003(b)(1)-(3) of the CARES Act.
  • The business must be able to make all certifications and covenants required under the Main Street Program. The certifications and covenants are mostly the same under each of the three Main Street Program facilities, with a variation related to debt repayment in connection with the MSPLF.

NONPROFITS

Overview of the Main Street Program

The Main Street nonprofit loan terms generally mirror those for Main Street for-profit business loans, including the interest rate, principal and interest payment deferral, five-year term, and minimum and maximum loan sizes. There are two loan options: the Nonprofit Organization New Loan Facility (“NONLF”) and the Nonprofit Organization Expanded Loan Facility (“NOELF”). Both facilities use the same lender and borrower eligibility criteria, and have many of the same features, including the same maturity (five years), interest rate (LIBOR plus 3%), deferral of principal for two years, and deferral of interest for one year. The loan options are available to a broad range of nonprofits (IRC 501(c)(3) and 501(c)(19) entities), including hospitals, senior care and housing communities, museums, animal rights organizations, performing arts organizations, educational institutions, and social service organizations.

Below are brief summaries of the distinct features of each loan facility:

  • NONLF: Under the NONLF, eligible lenders extend loans to eligible nonprofits with such loans ranging in size from $250,000 to $35 million. The NONLF loan must not be, at the time of origination or at any time during the term of the loan, contractually subordinated in terms of priority to any of the nonprofit’s other loans or debt instruments. Additional information about the unique features of NONLF loans is provided in the term sheet.
  • NOELF: Under the NOELF, eligible lenders upsize an eligible nonprofit’s existing term loan or revolving credit facility. The upsized tranche is a five-year term loan ranging in size from $10 million to $300 million. At the time of upsizing, and at all times thereafter, the upsized tranche must be senior to or on equal footing with (pari passu), in terms of priority and security, the nonprofit’s other loans or debt instruments, other than mortgage debt. Additional information about the unique features of the NOELF loans is provided in the term sheet.

Eligibility Requirements for Nonprofits to Participate

The nonprofit borrower eligibility criteria are the same for both of the nonprofit Main Street Program facilities. Below is a summary of the key eligibility criteria.

  • The nonprofit borrower must be a nonprofit organization as described in section 501(c)(3) or 501(c)(19) of the Internal Revenue Code and have been in continuous operation since January 1, 2015.
  • The nonprofit must not be an ineligible business. The Federal Reserve will deem businesses ineligible based on the Small Business Administration’s ineligibility criteria, as set forth in 13 CFR 120.110(b)-(j), (m)-(s), and as this criteria has been modified and amended by the Small Business Administration for purposes of the Paycheck Protection Program on or before April 24, 2020. Such modifications include interim final rules available at 85 Fed. Reg. 20811, 85 Fed. Reg. 21747, and 85 Fed. Reg. 23450.
  • The nonprofit must meet one of two conditions tied to either employee head count or annual revenues. Eligible nonprofits must either (i) have 15,000 employees or fewer or (ii) have had 2019 annual revenues of $5 billion or less. Nonprofits must meet at least one of these conditions, but are not required to meet both. To determine these figures, the nonprofit must aggregate its employees and revenue figures with the employees and revenues of the nonprofit’s affiliates.
  • The nonprofit must have at least 10 employees.
  • The nonprofit must have an endowment of less than $3 billion.
  • The nonprofit’s non-donation revenues must account for 60% or more of expenses from 2017 to 2019. For purposes of this requirement, “non-donation revenues” are equal to the amount of gross revenues minus donations. Additionally, “donations” include proceeds from fundraising events, federated campaigns, gifts, donor-advised funds, and funds from similar sources, but exclude (i) government grants, (ii) revenues from a supporting organization, (iii) grants from private foundations that are disbursed over the course of more than one calendar year, and (iv) any contributions of property other than money, stocks, bonds, and other securities (noncash contributions), provided that such noncash contribution is not sold by the organization in a transaction unrelated to the organization’s tax-exempt purpose. “Expenses” are a nonprofit’s total expenses minus depreciation, depletion, and amortization.
  • The nonprofit must have had an operating margin of 2% or more in 2019. The operating margin ratio is the adjusted 2019 earnings before interest, depreciation, and amortization (“EBIDA”) to unrestricted 2019 operating revenue.
  • The nonprofit must have current days’ cash on hand for 60 days. This ratio (expressed as a number of days) is (i) liquid assets at the time of loan origination to (ii) average daily expenses over the previous year, equal to or greater than 60 days. For purposes of this requirement, “liquid assets” is defined as unrestricted cash and investments that can be accessed and monetized within 30 days. An organization may include in “liquid assets” the amount of cash receipts it reasonably estimates to receive within 60 days related to the provision of services, facilities, or products, or any other program service that exceeds its reasonably estimated cash outflows payable within the same 60-day period.
  • The nonprofit must not be overleveraged—current debt repayment capacity of greater than 55%. At the time of loan origination, the nonprofit must have a ratio of (i) unrestricted cash and investments to (ii) existing outstanding and undrawn available debt, plus the amount of any loan under the Program, plus the amount of any Centers for Medicare and Medicaid Services (CMS) Accelerated and Advance Payments, that is greater than 55%.
  • The nonprofit must be a U.S. nonprofit. Only nonprofits created or organized in the United States or under the laws of the United States with significant operations in and a majority of their employees based in the United States are eligible.
  • The nonprofit may only participate in one of the Main Street facilitiesand must not also participate in the PMCCF or the Municipal Liquidity Facility.
  • The nonprofit must not have received specific support pursuant to the Coronavirus Economic Stabilization Act of 2020(Subtitle A of Title IV of the CARES Act). Nonprofits that have received PPP loans are permitted to borrow under the Program, provided that they are eligible borrowers.
  • The nonprofit must be able to make all certifications and covenants required under the Main Street Program.

ALL BORROWERS

Certifications and Covenants Required to Participate

In addition to certifications required by applicable statutes and regulations, the lender must obtain certain certifications and covenants from a borrower at the time the loan is originated, including:

  • A certification that it reasonably believes that, after giving effect to the eligible loan, it has the ability to meet its financial obligations for at least the next 90 days and does not expect to file for bankruptcy during that period;
  • A certification that it is eligible to participate in the applicable facility, including that it is not a covered entity subject to the conflict of interest prohibition in the CARES Act;
  • A covenant that it will not seek to cancel or reduce committed lines of credit with the lender or any other lender; and
  • A covenant that it will comply with the restrictions under Section 4003(c)(3)(A)(ii) of the CARES Act that require a borrower to not engage in stock buybacks if it is listed on ‎an ‎exchange, to agree to a cap on executive compensation for a period ending one year ‎after ‎the loan is repaid, and to not pay dividends while the loan is outstanding, except that an S corporation or other tax pass-through entity that is a borrower may make distributions to the extent reasonably required to cover its owners’ tax obligations for the borrower’s earnings.

Additionally, each borrower must make commercially reasonable efforts to maintain its payroll and retain its employees, in light of its capacities, the economic environment, the borrower’s available resources, and the business need for labor while the loan is outstanding.

Schwabe is closely monitoring developments related to the PPP and other legal implications of COVID-19. We encourage you to visit Schwabe’s COVID-19 and CARES Act resource pages for the most up-to-date information as it becomes available.

Professionals

Related Services

Related Industries