The Fed’s Main Street Loan Program: Who Qualifies?

The Federal Reserve announced the creation of new loan programs to help midsize businesses that need access to cash due to the coronavirus pandemic.

The central bank has said it will provide up to $ 600 billion in loans under the Main Street Lending Program, which consists of two different emergency lending facilities. The Fed did not attempt such direct loan program since the 1930s. Here is an overview of some frequently asked questions:

What types of businesses are eligible for the program?

The program is designed for businesses with up to 10,000 employees or up to $ 2.5 billion in revenue in 2019.

Will businesses apply directly to the government for loans?

No. The program is not yet operational, but when it is, businesses will go through the banks for loans.

How is this different from the Paycheque Protection Program?

The PPP is administered by the Small Business Administration to provide forgivable loans to businesses with fewer than 500 employees, so that they can pay up to eight weeks of labor costs.

Can Small Businesses Use the Main Street Lending Program?

Yes. The Fed’s MSLP is designed to reach large companies that are unable to obtain financing from the PPP, but small companies, including those participating in the PPP, can also apply for loans from the MSLP.

Some very small businesses may decide that it is not worth using the MSLP because the minimum loan amount is $ 1 million and the rates will be higher than on PPP loans.

How will the program work?

The Fed creates two different loan facilities, one for new loans and one for existing loans. Businesses can obtain financing only from one of the two facilities.

Under these programs, an eligible bank will make a loan or reissue part of an existing loan for a maximum of four years. Payment of principal and interest may be deferred for one year. The loans will be priced using the adjustable guaranteed overnight finance rate plus 2.5 to 4 percentage points, and there is also an upfront 1 percentage point origination fee. Loans can be prepaid without penalty.

Fed Chairman Jerome Powell on Thursday explained the Fed’s new round of $ 2.3 trillion of lending programs in an online forum, but pointed to the limits on the central bank’s powers to stop the economic impact of the coronavirus pandemic. Photo: Eric Baradat / AFP

How much can eligible businesses borrow?

For the new loan facility, the maximum loan is $ 25 million or an amount which, added to the borrower’s existing debt outstanding and committed but not used, does not exceed four times the 2019 profit of the borrower before interest, taxes, depreciation and amortization, The smallest.

For the existing loan facility, the maximum loan amount is the lesser of $ 150 million; or 30% of the borrower’s outstanding and committed existing bank indebtedness but not used; or an amount which, added to the borrower’s existing debt outstanding and committed but not used, does not exceed six times the borrower’s 2019 profit before interest, taxes, depreciation and amortization.

Will the Fed lose money on these loans?

It is too early to tell. The banks will sell 95% of the loan to the Fed, keeping a 5% stake in order to keep some skin in the game. The Treasury Department is providing $ 75 billion to cover loan losses. And the limits on the amount of leverage that qualifying companies can have will limit access to the program for heavily indebted companies.

What other restrictions come with these loans?

Banks must certify that the proceeds of any loan will not be used to repay or refinance any pre-existing loans or lines of credit that they have granted to the borrower. Borrowers must agree to refrain from using the proceeds of the new loan to repay other loan balances.

Borrowers must certify that they need financing due to the challenges posed by the coronavirus pandemic and that they will make reasonable efforts to maintain payroll and employees during the life of the loan.

Beneficiaries cannot pay dividends or repurchase shares during the term of the loan or for 12 months after its repayment due to restrictions imposed by Congress in the Cares Act, which provided for funds that the Treasury uses to support loans. Well-paid executives and officers are also prohibited from increasing the salary of any employee whose compensation exceeded $ 425,000 in 2019.

The Fed created a separate facility for the issuance of corporate debt securities by top-rated companies. Can borrowers use both programs?

No. Borrowers must choose between obtaining a new loan from the Main Street Lending Program or issuing a new security through the Primary Market Business Credit Facility.

Are Primary Market Business Credit Facility loans subject to the same restrictions on dividends, share buybacks and executive compensation?

No. Congress applied these restrictions only to “direct loans”. Fed officials concluded that although loans under the Main Street Lending Program fall under the definition of direct lending, the PMCCF engages in capital market transactions. In this facility, the Fed buys corporate bonds as the sole investor, or it will buy portions of syndicated loans or bonds alongside other investors.

Where can I find more information on these programs?

The Fed has published the termsheets for the new-ready and existing loan programs.

Write to Nick Timiraos at [email protected]

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