Executive Summary: On Thursday, April 9, 2020, the Federal Reserve announced it was taking additional steps to backstop loans made available through the CARES Act, including the Paycheck Protection Program and the mid-size business loans, by providing up to $2.3 trillion in loans to support the economy. In addition to announcing the additional funds, the Fed announced two new lending programs: the Main Street Business Lending Program, designed to enhance support for small and mid-sized businesses that were in good financial standing before the crisis, and the Municipal Liquidity Facility, meant to help state and local governments better manage cash flow pressures. For businesses seeking loans under the Paycheck Protection Program or other provisions of the CARES Act, this move is designed to expand the amount of available funds and ensure that businesses that need the funds to give themselves the best chance of enduring through the COVID-19 pandemic are able to obtain the funds they need.
Additional Funding for Small Business Loans
The Federal Reserve announced it will backstop loans generated under the popular Paycheck Protection Program by allowing lending banks to pledge the loans as collateral at face value for Federal Reserve financing to cover additional loans. By backstopping these loans, the Fed is providing more financing to lending facilities, which will make more money available to small businesses trying to take advantage of the Paycheck Protection Program. It is unknown when these additional funds will become available, but FordHarrison will continue to update our clients as new information arises.
Main Street Business Lending Program
The Main Street Lending Program announced by the Fed aims to provide supplemental support to mid-sized businesses too large to apply for forgivable loans under the Paycheck Protection Program, but it remains an open avenue for additional funding for small businesses as well. For businesses in good standing before the COVID-19 outbreak, the Federal Reserve is offering 4-year loans to companies employing up to 10,000 employees, or with revenues of less than $2.5 billion, which can be utilized as either original loans or to increase the size of existing loans already taken under the CARES Act. This new program is said to support up to $600 billion in loans to small and mid-sized businesses.
For new loans, companies may obtain loans between $1 million and of the lesser of (1) $25 million and (2) up to four times the borrower’s 2019 EBITDA. The loans obtained through this program have a four year maturity period, one year principal and interest deferral, and allow for prepayment of the loan without penalty. Applicants must make certain certifications to the lender, including that:
- the loans will not be used to repay or refinance other loans;
- the borrower will not cancel or reduce existing lines of credit;
- the borrower requires the loan due to the exigent circumstances presented by the COVID-19 pandemic;
- the borrower will use the loan to make a reasonable effort to maintain payroll and retain employees; and
- the borrower will follow executive compensation, stock repurchasing, and capital distribution restrictions that apply to direct loan programs under the mid-size business loan provisions of the CARES Act.
For expanded loans (in addition to other loans under the CARES Act), companies are permitted to borrow between $1 million and the lesser of (1) $150 million, (2) 30% of the borrower’s existing outstanding and committed but undrawn bank debt, and (3) an amount that, when added to the eligible borrower’s existing outstanding and committed but undrawn debt, does not exceed six times the borrower’s 2019 EBITDA. All other provisions are the same as those required for new loans under the Main Street program.
Additional guidance for the Main Street Lending Program is forthcoming, and the program will solicit feedback from the public on possible changes through April 16, 2020.
If you have any questions regarding this Alert, please feel free to contact the authors, Benjamin Fryer, a partner in FordHarrison’s Charlotte office, at bfryer@fordharrison.com, or Garrett Buttrey, an associate in FordHarrison’s Washington, D.C. office, at gbuttrey@fordharrison.com. Of course, you may also contact the FordHarrison attorney with whom you regularly work.
FordHarrison is closely monitoring the spread of Coronavirus and associated federal and state legislation and has implemented continuity plans, including the ability to work remotely in a technologically secure environment when necessary, to ensure continuity of our operations and uninterrupted service to our clients. We are following all CDC guidelines and state and local laws as applicable. We are committed to ensuring the health and welfare of our clients, employees, and communities while continuing to provide our clients with the highest quality service. Please see our dedicated Coronavirus Taskforce and Coronavirus – CARES Act pages for the latest FH Legal Alerts and webinars on Coronavirus and workplace-related provisions of the CARES Act, as well as links to governmental and industry-specific resources for employers to obtain additional information and guidance. For more information or to be connected with a Coronavirus Taskforce or CARES Act attorney, please contact clientservice@fordharrison.com.