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The Main Street New Loan Facility Program was established as a part of the CARES Act earlier this year to provide banks with a 95% guaranteed re-payment when they extend credit under this program to a business borrower.
In an apparent reaction to the delay in extending new PPP loans the SBA announced on Friday, October 30 that it is expanding the Main Street New Loan Facility Program to now permit loans as small as $100,000, in lieu of the former $250,000 minimum size, and confirmed that the Department of Treasury has committed to make $75 billion available for the Program.
Under the Program, a U.S. federally insured depository institution (a bank whose deposits qualify for FDIC protection) is able to make a loan to a borrower and immediately transfer 95% of the risk and reward of the loan to the Federal Reserve Bank of Boston (the “Reserve Bank”).
The announcement points out that the combined size of all Main Street New Loan Facility Programs will be $600 billion.
In order to be an “eligible borrower” the individual or entity must have been established prior to March 13, 2020 as a for-profit “business” that would be eligible to borrow money under the PPP. This may be evidenced by the fact that the borrower has already received a PPP loan. A borrower cannot be insolvent at the time that the loan is made, except to the extent that the insolvency is caused solely by the economic and business circumstances caused by COVID-19.
Apparently businesses that received EIDL (“Economic Injury Disaster Loans”) will not be eligible, but those individuals and businesses who received the EIDL non-repayable grants of between $1,000 and $10,000 will be eligible if they did not otherwise receive an EIDL loan.
What’s in it for the Banks?
Besides saving customers from potential devastation or closure due to the COVID-19 economic crisis, lenders are permitted to receive a Loan Servicing Fee of 0.25-0.5% of the principal amount owed on the loan each year, paid for by the Program. For loans under $250,000, lenders will receive a 2% loan origination fee to be paid by the borrower and a 0.5% per year servicing fee that will be paid by the Program. For loans of $250,000 or more, lenders can require the borrower to pay a 1% transaction fee and a 1% loan origination fee, and will receive a 0.25% annual loan servicing fee that will be paid by the Program.
The bank making the loan cannot require that the loan proceeds be used to pay other bank indebtedness. Borrowers must refrain from repaying other debts, except to the extent that other debts become due under their terms.
Each Main Street Loan will have the following features:
1. All amounts owed, plus interest, will be due and payable within 5 years of the date that the loan is given.
2. There will be no interest for the first year and no principal payments for the first two years. Unpaid interest will be accrued.
3. Interest will be based upon the “adjustable rate of LIBOR (one or three months) plus 300 basis points.” This generally means that the loan will bear interest at a floating rate exceeding 3% per year. Presently LIBOR (London Inter-bank Offered Rate), which is the European equivalent to the U.S. Prime Rate, is approximately 0.2%, so the present rate would be approximately 3.2%.
4. The principal will be amortized based upon 15% of the loan amount due at the end of the third year, 15% at the end of the fourth year, and a balloon payment of 70% at maturity at the end of the fifth year.
The loan cannot be subordinated to any other loans owed by the borrower, meaning that the bank making the loan cannot have a first lien on assets of the borrower to enforce other loans then outstanding. This applies both to loans with the sponsoring lender, and with any other lenders.
5. The borrower can pre-pay the loan at any time without penalty.
If banks mobilize to make use of the $75 billion that has been set aside, many more small businesses will survive than would otherwise have been the case, with banks receiving reasonable fees while risking only 5% of the loan amount to hopefully save a good customer, jobs, and other businesses that may be reliant upon a business that is saved through the program.
Other requirements
Main Street New Loan Facility Borrower Certifications and Covenants Instructions and Guidance that were issued on June 11, 2020 to apply to borrowers receiving $250,000 or more in loans will also apply to the borrowers receiving $100,000 or more and provide as follows:
a. Until 12 months after the loan has been paid in full the borrower must agree not to pay dividends or make capital distributions to its owners, except that the borrower can make distributions sufficient to enable its owners to pay taxes on the entity’s income.
b. The borrower must certify that it is unable to secure adequate credit accommodations from other banking institutions because the amount, price, or terms of credit available from other sources are inadequate for the borrower’s need (during the current unusual and exigent circumstances).
c. That the borrower is not insolvent or “generally failing to pay its undisputed debts as they become due” during the 90 days preceding the date of borrowing, except to the extent that it is behind on its debts for reasons other than disruptions to its business.
Under this rule a “person or entity” would not be insolvent or “generally failing to pay its undisputed debts as they become due” if it is behind on its debts because of reduced business activity resulting from stay-at-home, shelter-in-place, social distancing, or similar orders or recommendations by federal, state, or local government authorities related to the COVID-19 pandemic, or if expected and routine sources of funding were unexpectedly unavailable due to market conditions resulting from the COVID-19 pandemic.
Businesses that were insolvent in the 90 days preceding the later of March 1, 2020 or the date in which changes in business activity related to COVID-19 commenced will not be able to borrow under this program.
Finally, the loans will be “recourse,” meaning that they cannot be forgiven in the way that PPP loans can.
Certainly there will be frustration, confusion, and disorganization with respect to applying, considering, and issuing Main Street New Loan Facility Loans, but thousands of businesses and tens of thousands of jobs may be saved by those banks that properly mobilize to help their borrowers receive the intended advantage of this program.