Following feedback from individuals, businesses and non-profits, the Federal Reserve has announced it will expand its Main Street Lending Program (MSLP) to include larger businesses and broader types of loans. For background, as part of the CARES Act, the Federal Reserve provided $600 billion to purchase eligible loans under the MSLP, which is designed to help small and medium size businesses whose operations have been negatively impacted by the COVID 19 pandemic.
The structure of the MSLP involves the Federal Reserve Bank of Boston setting up a special purpose vehicle (SPV) to purchase participations in loans originated by eligible lenders. Eligible lenders include any FDIC insured depository institution. Eligible lenders are required to retain a percentage of the loans.
The Federal Reserve solicited input from the program’s initial roll out and received approximately 2,200 responses, prompting the Fed to expand and change the program.
Key points to this expansion include the following:
- The MSLP will now allow businesses with up to 15,000 employees and $5 billion in 2019 revenue to apply for financing. The previous limits were 10,000 employees and $2.5 billion in 2019 revenue.
- The Fed is also now offering a different set of loans. The changes break the loans into three categories: new, priority and expanded. New and priority loans have a minimum loan size of $500,000. The previous minimum loan size was $1,000,000, which was too high for some smaller businesses. Expanded loans have a minimum size of $10,000,000.
- The maximum amount of the loans vary. For new loans, it’s the lesser of $25 million or four times 2019 adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) plus a borrower’s existing outstanding and undrawn available debt. Priority loans are limited to the lesser of $25 million or six times adjusted EBITDA plus existing outstanding and undrawn available debt. Expanded loans are limited to the lesser of $200 million, six times adjusted EBITDA plus existing outstanding and undrawn available debt or 35% of outstanding and undrawn available debt.
- Each loan term is four years, with a variable interest rate of LIBOR plus 3%. (LIBOR is an overnight borrowing benchmark rate for banks.) Principal and interest payments will be deferred for one year. Unpaid interest will be capitalized.
- With these new loan options, banks are required to own 5% of new loans, 15% of priority loans and 5% of expanded loans. Previously, banks were required to own 5% of any MSLP loan.
- Principal Repayment terms for new loans are 1/3 at the end of the second year, 1/3 at the end of the third year and 1/3 at the end of the fourth year. Repayment terms for priority and expanded loans are 15% at the end of the second year, 15% at the end of the third year and 70% at the end of the fourth year.
- There are no prepayment penalties.
- Eligible loans are secured or unsecured loans made by eligible lenders to eligible borrowers after April 24, 2020.
- Each borrower should make commercially reasonable efforts to maintain its payroll and retain its employees during the term of the loan.
- Lenders will be required to pay the Fed SPV a transaction fee of 75 basis points of the principal amount of the loan. Lenders may require borrowers to pay this fee.
It is important to note that MSLP loans are different from PPP loans in that MSLP loan are not grants. Also, MSLP loans are administered directly by the Federal Reserve, not the SBA.
The Federal Reserve has yet to determine a launch date for this expanded program. KJK will continue to monitor the status of the newly expanded MSLP program. If you have questions or need further information, please contact Anne Corrigan at atc@kjk.com or 216.736.7227.