Main Street Lending Program – What Businesses Should Know

Source: Sonder Quest on Unsplash

On April 9th, 2020 the Federal Reserve announced the creation of the Main Street Lending Program – a novel pair of credit facilities that will provide credit to eligible businesses with a maximum of 10,000 employees or a maximum of $2.5 billion in annual revenues. The Program will achieve this by purchasing up to $600 billion in loans.

The Program’s facilities are designed to support lending to both investment-grade and below investment-grade borrowers. Moreover, these facilities are separate from the other mid-sized business loan program contemplated in the CARES Act. Since I dedicated last week to expanding on the programs designed for large firms, I wanted to take some time this week to dive into the Fed’s solution for medium-sized businesses. I’ll start by providing an overview of the two facilities that comprise the Main Street Loan Program and then wrap up the post by identifying potential risks businesses should be aware of before applying for relief under this program.


The Program is comprised of two facilities: first, the Main Street New Loan Facility (MSNLF) applies to eligible unsecured new terms loans originated on or after April 8th, 2020. Second, the Main Street Expanded Loan Facility (MSELF) applies to eligible “upsized tranches” (sometimes referred to as debt accordions) to existing secured or unsecured loans originated before April 8th, 2020 (provided the upsize occurs on or before April 8th, 2020). The primary differences between the terms of the two facilities relate to maximum loan amounts and collateral requirements (see table below).

Similar to the other Fed facilities explored on this blog, the Main Street Lending Program will utilize an SPV to facilitate transactions. Specifically, the SPV will purchase a 95% stake in each of the loans made to borrowers under the program and eligible lenders will retain the remaining 5%. The SPV will be seeded by $75 billion from the Treasury and will utilize leverage to meet the $600 billion obligation discussed above. Eligible lenders are U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies. Non-bank lenders are currently ineligible.

Table 1 – Differences Between MSNLF and MSELF:

Source: Miller Canfield

Risks for Businesses

First, unlike the PPP loan program, loans made under the Main Street Program need to be repaid in full. There are no provisions for loan forgiveness under this program. As shown above, the loans are underwritten to 4 year terms with variable interest rates. Repayment can be deferred for up to 1 year, but this is only grace period allowed.

Second, despite being called the Main Street Lending Program, the minimum loan amounts for both credit facilities are $1,000,000 – a far larger sum than is normal and customary for small-to-medium sized business loans. Typically, a commercial bank will lend up to 2-3 times a borrower’s earnings before interest, taxes, depreciation and amortization (EBITDA) and require some form of collateral. For many small businesses, 2-3 times EBITDA still falls well below $1,000,000. Under the Main Street Program facilities, many small businesses would be required to leverage themselves 4-6 times above EBITDA (depending on whether or not they are accepting a new loan, or adding on to an existing loan). Banks tend to be hesitant about providing excess leverage, as the likelihood of default increases when repayment capacity is diminished or all together inadequate. Conversely, there are few incentives for a small-to-medium sized business to take on excessive leverage given the 4 year expiry and variable rate.

Finally, it is also important to consider the fact that some lenders may not be interested in originating these loans. As currently written, the Fed’s term sheet implies that loans made under the Main Street Program will be senior to any other existing notes. Moreover, the Main Street Program facilities cannot be utilized to refinance existing debt. While it is still unclear to what degree these loans will be made senior over others, the ambiguity in the existing term sheet doesn’t help much in terms of establishing buy-in from eligible lenders. Ultimately, it appears that significant deterrents exist on both sides of the equation. While the impact of the Main Street Lending Program remains to be seen, I believe the overall result will unfortunately be underwhelming.

As always, thank you for taking the time to read my thoughts. If you found this information valuable, please be sure to like, subscribe and share with others.

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