Exhausted Your CARES Act Paycheck Protection Program Options? Main Street Lending Can Provide Additional Liquidity
Updated April 30, 2020.
One of the most highly publicized relief options in the Coronavirus Aid, Relief, and Economic Security (CARES) Act that small businesses and sole proprietors have benefitted from is the Paycheck Protection Program (PPP). The PPP authorized $349 billion to be disbursed via federally guaranteed loans administered by the Small Business Administration (SBA). Generally, eligible borrowers can receive 2.5x their 2019 average monthly payroll costs to help retain workers, maintain payroll and cover certain other existing overhead costs amid the pandemic. As a direct incentive to keep workers employed, all or a portion of the loan may be forgiven if the borrower uses the loan for payroll, rent, mortgage interest or utilities for an eight-week period after the loan is received. BDO's Small and Midsize Businesses: Act Now to Take Advantage of SBA Loans and Payroll Tax Incentives insight provides additional details of the PPP.
However, many businesses have not been able to qualify under the PPP because of, among other things, affiliation restrictions and employee headcount size. Others were not been able to file a PPP application or get approval prior to the funds being depleted. Indeed, on April 16, the SBA announced that the entire $349 billion of initial PPP funding had been exhausted.[1]
Even small businesses that have been granted loans under the PPP - or will be, due to the increased PPP funding –, it is likely that many will still face major liquidity challenges down the road. These liquidity issues will also exist if small businesses are using the CARES Act employee retention tax credit or temporary payroll tax deferral. The unfortunate reality leaves businesses looking for other potential avenues for cash to stabilize, maintain or continue operations. Fortunately, there are other options available.
Relief Beyond the PPP: $500 Billion Coronavirus Economic Stabilization Plan
Small and medium-sized businesses should be aware that other programs exist under the CARES Act to provide much-needed liquidity in lieu of, or in addition to, relief under the PPP. In particular, Title IV authorizes the Secretary of the Treasury to make loans, loan guarantees and other investments of up to $500 billion to eligible businesses operating in severely distressed sectors of the economy. $46 billion is earmarked for air carriers and businesses critical to national security. The remaining $454 billion is available to lend to other businesses via various loan programs established by the Treasury or Federal Reserve.
Main Street Lending Program (MSLP)
The Federal Reserve created the Main Street Lending Program, whereby the Treasury will carve out $75 billion of the available $454 billion under Title IV to make an equity investment in a special purpose vehicle (SPV), which will enable the flow of credit to small and medium-sized businesses that were in good financial standing prior to the COVID-19 crisis. Businesses can refer to flowchart below to assist in determining eligibility:
FAQ
Below are frequently asked questions regarding the MSLP and how eligible businesses may be able to take advantage of the program.
Q: If a small business is participating in the PPP, is it also eligible to participate in the MSLP?
A: Yes. A borrower who has applied for or received a loan under the PPP may receive a loan under the MSLP, assuming the borrower meets the eligibility criteria outlined by the Federal Reserve (discussed below).
Q: What loan facilities are available under the MSLP?
A: There are three. The Main Street New Loan Facility (MSNLF) is directed at facilitating new loans; the Main Street Expanded Loan Facility (MSELF) is focused on expanding existing loans to businesses; and the Main Street Priority Loan Facility (MSPLF) which requires increased risk sharing by lenders for borrowers who are more leveraged.
Q: Can borrowers obtain a loan under more than one MSLP facility?
A: No.Borrowers can only participate in one facility. However, borrowers may receive more than one loan under a single MSLP facility in certain circumstances.
Q: Can borrowers participate in other Title IV programs if they participate in a MSLP facility?
A: No. Although the borrower can stack the PPP with the Main Street Programs, the same consideration is not offered for the five other Title IV programs.
Q: What are the specific eligibility criteria?
A: A prospective borrower must meet each of the following criteria:
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Be a business established prior to March 13, 2020;
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Be a business that can demonstrate a need for financing due to the COVID-19 pandemic;
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Employ up to 15,000 employees or had 2019 annual revenues of $5.0 billion or less;
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Created or organized in the U.S. with a significant portion of its operations and employees based in the U.S.; and
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Been in good financial standing prior the COVID-19 pandemic (i.e., not in a bankruptcy proceeding).).
Q: Can companies with less than 500 employees qualify (i.e., those that applied for the PPP)?
A: A business that receives a loan through the SBA’s PPP can be an eligible borrower under the MSLP if it meets the eligible borrower criteria.
Q: Are there any affiliation restrictions/requirements similar to the PPP?
A: Eligibility is based on a business’s 2019 revenues and employee headcount and those of its affiliated entities in accordance with the affiliation test set forth in 13 CFR 121.301(f).
Q: Can a U.S. subsidiary of a foreign company be eligible under the MSLP?
A: The Federal Reserve has not explicitly excluded a U.S. subsidiary of a foreign company from the program, so long as the entity is organized under the laws of the U.S. and the majority of its employees are based in the U.S.
Q: Are MSLP loans potentially forgivable similar to those issued under the PPP?
A: No. Loans made as part of the MSLP are not forgivable. However, there is no pre-payment penalty.
Q: How much of a loan is a borrower eligible for?
A: For businesses seeking loans under MSNLF:
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The minimum loan amount is $500,000, and the maximum size is the smaller of either (1) $25 million or (2) the loan amount, when added to the eligible borrower’s existing outstanding and undrawn available debt, does not exceed 4x the borrower’s 2019 adjusted EBITDA.
For businesses seeking an expansion of loans under MSELF:
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The minimum loan amount is $10 million, and the maximum amount of loan expansion is the lesser of (1) $200 million, (2) 35% of the eligible borrower’s existing outstanding and undrawn available debt or (3) the loan amount, when added to the eligible borrower’s existing outstanding and undrawn available debt, does not exceed 6x the borrower’s 2019 adjusted EBITDA.
For businesses seeking loans under MSPLF:
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The minimum loan amount is $500,000, and the maximum size is the smaller of either (1) $25 million or (2) the loan amount, when added to the eligible borrower’s existing outstanding and undrawn available debt, does not exceed 6x the borrower’s 2019 adjusted EBITDA.
Q: When does the program start/end?
A: The Federal Reserve has not yet stated when the program will begin. Guidance from the Federal Reserve is still evolving, and once it is complete the program will be initiated. The SPV is scheduled to stop purchasing loans on September 30, 2020.
Q: Who will be responsible for making the loans?
A: Loans are made by eligible banks, not by the Treasury or Federal Reserve. The SPV will purchase either 85% or 95% of the loans at par value, and eligible lenders will retain 5% or 15%, which will be subject to Federal Reserve oversight.
Q: Is there a repayment deferment period?
A: Yes. Principal and interest payments are deferred for one year. Interest will still accrue at loan inception and be capitalized into the loan balance once the amortization period starts.
Q: Can an eligible borrower use any portion of the loan proceeds to pay off existing debt?
A: No. Eligible borrowers cannot use loan proceeds to repay other loan balances or other debt of equal or lower priority unless the eligible borrower has repaid the eligible loan in full. However, under the MSPLP, an eligible borrower can refinance existing debt owed to a lender that is not the eligible lender at the time the MSPLF loan is originated.
Q: Are there any restrictions on stock repurchases during the term of the loan?
A: Yes. For the period starting when the loan proceeds are received and ending 12 months after the loan is paid in full, a borrower cannot make stock repurchases if the securities are listed on a national securities exchange, except as required under a contractual obligation in effect as of March 27, 2020. However, restrictions on dividends and other capital distributions will not apply to distributions made by an S corporation or other tax pass-through entity to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings.
Q: Are there any restrictions on employee compensation during the term of the loan?
A: Yes. For the period starting when the loan proceeds are received and ending 12 months after the loan is paid in full, total compensation for certain highly compensated employees is restricted as follows:
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For employees whose 2019 total compensation exceeded $425,000, he/she cannot receive (1) more than his/her total 2019 compensation (for any consecutive 12-month period) or (2) severance/termination pay greater than 2x 2019 compensation.
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For employees whose 2019 total compensation exceeded $3 million, he/she cannot receive (for any consecutive 12-month period) total compensation greater than $3 million plus 50% of his/her 2019 total compensation in excess of $3 million.
Q: Will the eligible borrower be required to collateralize the loan?
A: MSNLF loans, MSPLF loans, and MSELF upsized tranches may be secured or unsecured. For example, an upsized tranche (MSELF) must be secured if the underlying loan is secured.
Q: Will the MSELF loan be subordinate to existing debt?
A: No. The upsized tranche will be issued on a pari passu basis, exclusive of mortgage debt.
Q: What interest rate will be charged to borrowers?
A: An adjustable rate of LIBOR (1 or 3 month) plus 3% will be charged.
Q: What is the term of the loans?
A: Loans will have a four-year maturity.
Q: Are there any restrictions on reducing employee headcount or payroll when accepting a MSLP loan?
A: Borrowers must make “reasonable efforts” to maintain payroll and retain its employees during the term of the loan. Specifically, borrowers should undertake good-faith efforts to maintain payroll and retain employees, in light of its capacities, the economic environment, its available resources, and the business need for labor. Businesses that have already laid-off or furloughed workers as a result of the disruptions from COVID-19 are eligible to apply for MSLP loans.
Q: Will private equity be eligible to participate?
A: The Federal Reserve has not explicitly excluded private equity and other venture-backed businesses from being able to participate, so long as the other eligibility requirements are satisfied. However, the Federal Reserve may release additional details of the program, including affiliation rules as seen in the PPP, which could change eligibility.
Q: Can businesses which are in bankruptcy proceedings be eligible for loans under the MSLP?
A: No. Eligible businesses cannot be in bankruptcy proceedings to participate.
Q: Are there any fees that borrowers will be responsible for?
A: Borrowers will pay up to 100 basis points of the principal amount of the loan (MSNLF & MSPLF) to the lender as an origination fee or will pay 75 basis points of the principal amount of the upsized tranche (MSELF) to the lender at the time of upsizing. However, lenders have discretion over whether and when to charge borrowers either of these fees.
Also, lenders will pay the SPV a transaction fee of 75 basis points of the principal amount of the upsized tranche (MSELF) or 100 basis points of the principal amount of the loan (MSNLF & MSPLF), which the lender may pass on to the borrower.
Q: Are non-profit organizations eligible to borrow under the MSLP?
A: Currently, non-profit organizations are not eligible to participate. The Federal Reserve and the Treasury Department will be evaluating the feasibility of adjusting the borrower eligibility criteria and loan eligibility metrics of the program for such organizations.
Q: Has the Federal Reserve provided a loan application for eligible businesses to begin applying?
A: The Federal Reserve has not yet released loan application details. We anticipate additional guidance will be forthcoming shortly.
Disclaimer: The above has been prepared solely for informational purposes. Any opinion expressed herein shall not amount to any form of guarantee that BDO USA, LLP (“BDO”) has determined or predicted future events or circumstances, and no such reliance may be inferred or implied. BDO accepts no duty of care or liability of any kind whatsoever to any party, and no responsibility for damages, if any, suffered by any party as a result of decisions made, or not made, or actions taken, or not taken, based on this information.
[1] On April 24, President Trump signed into a law a bill which provides an additional $310 billion for the PPP, plus $12 billion for administrative costs for the program.
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