CARES ACT-FEDERAL RESERVE: The Federal Reserve Announces Assistance for Small and Mid-Sized Businesses and Lenders Under the Main Street Lending Program and a New Paycheck Protection Program Loan Facility
Author: Bruce S. Goodman, Esq.
The CARES Act authorized the Federal Reserve to establish a Main Street Lending Program facility to extend credit to small and midsized businesses impacted by the COVID-19 crisis. This morning, the Federal Reserve announced various actions it intends to undertake, including purchasing up to $600 billion in loans to be extended pursuant to the Main Street Lending Program. The Treasury Department will use CARES Act appropriations to provide $75 billion in equity to the facility. The Federal Reserve also announced the Paycheck Protection Program Liquidity Facility which will extend credit to eligible financial institutions originating loans pursuant to the Paycheck Protection Program by taking the loans as collateral at face value.
Main Street Lending Program
- Will offer 4-year term loans to eligible borrowers that can attest they require financing due to the exigent circumstances presented by the COVID-19 pandemic, and will use the proceeds of the loan to make reasonable efforts to maintain payroll and retain employees during the term of the loan.
- Companies employing up to 10,000 workers and less than $2.5 billion in revenue are eligible.
- The adjustable interest rate will equal the Federal Reserve 's Secure Overnight Financing Rate (Currently 0.01%) +250-400 basis points.
- Minimum loan size: $1 million.
- Maximum loan size: the lesser of (i) $150 million, (ii) 30% of the borrower 's existing outstanding and committed but undrawn bank debt, or (iii) an amount that, when added to the borrower 's existing outstanding and committed but undrawn debt, does not exceed 6 times the borrower 's 2019 EBITDA.
- Loan terms will permit prepayment without penalty.
- Principal and interest payments on loans will be deferred for 1-year.
- Banks may originate new Main Street loans or use Main Street loans to increase the size of existing loans to businesses.
- Banks will retain a 5% share of the loan, and sell the remaining 95% to the Main Street Loan facility which will purchase up to $600 billion of loans.
- Businesses that obtained loans pursuant to the Paycheck Protection Program are also eligible to obtain a Main Street loan.
The Main Street Lending Program term sheet may be found here: https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200409a7.pdf
Paycheck Protection Program Liquidity Facility
The Federal Reserve also announced the Paycheck Protection Program Liquidity Facility (PPP Facility) which will extend credit to eligible financial institutions originating loans pursuant to the Paycheck Protection Program (PPP) by taking the loans as collateral at face value. Any depositary institution originating a PPP loan is eligible to borrow under the PPP Facility. Extensions of credit under the PPP Facility will be made at a rate of 35 basis points. There are no fees. The principal amount of an extension of credit under the PPP Facility will be equal to the principal amount of the PPP loan pledged as collateral. The PPP Facility will be open until September 30, 2020.
The PPP Facility term sheet may be found here: https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200409a6.pdf