Authors: Andrew C. Gold, Eric A. Stabler and Patrick J. O'Sullivan, Jr.
On April 9, 2020, pursuant to Section 13(3) of the Federal Reserve Act, the Federal Reserve and Treasury announced initiatives to provide $2.3 billion of financing to support the economy. The loans will assist households and employers of all sizes and support state and local governments to deliver necessary responses to the COVID-19 pandemic. Please note that businesses that have taken advantage of the Payment Protection Plan (PPP) loans may also take out loans under the Main Street Lending Program (as detailed below). The actions taken include:
- Using funds appropriated under the CARES Act, Treasury will make a $75 billion equity investment in a special purpose vehicle established to implement the Main Street Lending Program, which will purchase up to $600 billion in loans provided through the Main Street Lending Program;
- Supplying liquidity to the PPP by extending credit to eligible financial institutions participating in the program, taking the loans as collateral at face value;
- Establishing a Municipal Liquidity Facility that will offer up to $500 billion in lending to states and municipalities to provide essential services;
- Increasing the flow of credit to households and businesses through capital markets, by expanding the size and scope of the Primary and Secondary Market Corporate Credit Facilities (PMCCF and SMCCF), which will be used to purchase eligible corporate debt and will provide $750 billion in additional liquidity; and
- Expanding the Term Asset-Backed Securities Loan Facility (TALF), which was established to help meet the credit needs of American consumers and businesses by facilitating the issuance of asset-backed securities to provide up to $100 billion in additional liquidity, by now including highly rated newly issued collateralized loan obligations and legacy commercial mortgage-backed securities as eligible collateral.
Main Street Lending Program:
To facilitate lending to small and medium-sized businesses, the Federal Reserve has announced an initiative that will enable up to $600 billion in new financing for eligible borrowers. The program permits eligible lenders (as defined below) to originate new loans to eligible borrowers or increase the size of existing loans to eligible borrowers for borrowings that were originated before April 8, 2020. Borrowers seeking Main Street loans must certify, among other certifications, that it (i) requires financing due to exigent circumstances presented by COVID-19, (ii) will make reasonable efforts to maintain payroll and retain workers and (iii) will follow compensation, stock repurchase and capital distribution restrictions that apply to direct loan programs under the CARES Act.
An eligible borrower is:
- A business with (i) up to 10,000 employees or (ii) up to $2.5 billion in 2019 annual revenues; and
- Created or organized in the United States under the laws of the United States with significant operations in and most of its employees based in the United States.
An eligible lender includes (i) U.S. insured depository institutions, (ii) U.S. bank holding companies and (iii) U.S. savings and loan holding companies.
An eligible loan is an unsecured term loan made by an eligible lender to an eligible borrower with the following features:
- Four (4) year maturity;
- Amortization of principal and interest deferred for one (1) year;
- Adjustable rate of SOFR (currently 0.01%) + 250-400 basis points;
- Minimum loan size of $1 million;
- Maximum loan size for New Loan Facility:
- The lesser of (i) $25 million or (ii) an amount that, when added to the eligible borrower’s existing outstanding and committed but undrawn debt, does not exceed four (4) times the eligible borrower’s 2019 earnings before interest, taxes, depreciation, and amortization (EBITDA);
- Maximum loan size for Expanded Loan Facility:
- The lesser of (i) $150 million, (ii) 30% of the eligible borrower’s existing outstanding and committed but undrawn bank debt, or (iii) an amount that, when added to the eligible borrower’s existing outstanding and committed but undrawn debt, does not exceed six (6) times the Eligible Borrower’s 2019 EBITDA; and
- Prepayment permitted without penalty.
Please note the Board of Governors (Board) of the Federal Reserve System and Secretary of the Treasury may make adjustments to the terms and conditions described in this alert. Any changes will be announced on the Board’s website.
