April 17, 2020
Since Hand Law is focused on government, we are providing updates on how policymakers are responding to the pandemic – and what those responses mean for you. With the Paycheck Protection Program on hiatus, this sixth article focuses on a possible alternative: the Federal Reserve Main Street Lending initiative.
COVID-19 PUBLIC HEALTH UPDATE
The latest State of Florida report (Friday, 4/17 at 12:06 PM) shows 24,119 total cases. Please track statewide data and county information.
MAIN STREET LENDING PROGRAM
On March 27, Congress passed the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act – the largest economic stimulus package in modern U.S. history. The law directed nearly $350 Million to the Paycheck Protection Program (PPP) to help small businesses, non-profits and the self-employed obtain forgivable or low-interest lending to maintain payroll and fulfill other company obligations.
Initial PPP implementation was anything but smooth. Borrowers and lenders experienced logistical challenges amid high demand, with some financial institutions halting their application processes after a few days. Now, less than three weeks after the PPP was launched, the program is out of money. While Congress will likely provide additional funding, negotiations between White House and congressional negotiators have not reached agreement.
Since it is not clear when more dollars will flow, qualifying businesses without PPP funding may wish to consider another option: the Federal Reserve, which oversees monetary policy and governs the nation’s financial system. It has established a Main Street Lending Program “to support lending to small and medium-sized businesses that were in good financial standing before the onset of the COVID-19 pandemic.” For more information on this new initiative, please see www.federalreserve.gov/newsevents/pressreleases/monetary20200409a.htm & www.federalreserve.gov/monetarypolicy/mainstreetlending.htm. Key Main Street Lending facts include:
Main Street Lending is for U.S. companies with up to 10,000 employees or $2.5 billion in 2019 revenues.
Two options are available: (1) a “New Loan,” which is unsecured; or (2) an “Expanded Loan”, which gives borrowers the ability to increase current borrowing and extends any existing security to the enhanced obligation. Please see www.federalreserve.gov/publications/files/main-street-new-loan-facility-4-16-20.pdf and www.federalreserve.gov/publications/files/main-street-expanded-loan-facility-4-16-20.pdf
Both loans have four-year terms, with principal and interest deferred for the first year. The variable interest rate is calculated using the secured overnight financing rate (SOFR, currently .03%) plus 2.5% to 4%. Borrowers will not face any prepayment penalty but may not use proceeds to pay down other loans.
Minimum loan size is $1 million. Maximum New Loan size is the lesser of either $25 million or an amount not more than four times the borrower’s 2019 EBITA (Earnings Before Taxes, Depreciation and Amortization) minus any already committed but undrawn debt. Expanded Loans are the lesser of $150 Million, 30% of the borrower’s already committed but undrawn debt, or six times the borrower’s EBITA minus any already committed but undrawn debt.
While the Fed will provide most of the funding, existing U.S. financial institutions will make the loans. If your business is eligible for and interested in the Main Street Lending Program, please contact your bank or other lending partner to determine if and how it will be implementing the initiative.