On April 9, 2020, the Treasury Department and the Federal Reserve each issued a press release (Treasury release and Federal Reserve release) providing additional details about the two new Main Street Lending programs established further to the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), and the Federal Reserve posted term sheets for those programs.
Understanding the Main Street Lending Programs
Subject to final rules and regulations, the term sheets for the Main Street Lending programs set forth terms for the Main Street New Loan Facility (MSNLF) and the Main Street Expanded Loan Facility (MSELF).
MSELF is intended to upsize loans originated before April 8, 2020; MSNLF is intended for new loans originated on or after April 8, 2020.
Eligible Borrowers. Eligible borrowers will work directly with an eligible lender that will underwrite and make the loans. Eligible borrowers are businesses (1) with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues; and (2) that are created or organized in the United States or under U.S. law with significant operations and a majority of their employees in the United States. Companies that are debtors in a bankruptcy proceeding are not eligible borrowers. Borrowers may not participate in both MSNLF and MSELF.
Eligible Lenders. Eligible lenders are U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies.
Loan Terms. Eligible loans under each facility (i.e., the upsized tranche of an eligible loan under MSELF and any new loan under MSNLF) must have the following features:
- 4-year maturity;
- amortization deferred for one year;
- interest at an adjustable rate of the Secured Overnight Financing Rate (SOFR) plus 2.5 – 4%;
- minimum loan size of $1 million; and
- prepayment permitted without penalty.
Upsized Loans Under MSELF. An eligible loan under MSELF is an upsized term loan made by an eligible lender to an eligible borrower that was originated before April 8, 2020. The maximum loan size for the upsized tranche is the least of (1) $150 million; (2) 30% of the borrower’s existing outstanding and committed bank debt; and (3) an amount that, when added to the borrower’s existing outstanding and committed debt, would not exceed six times the borrower’s 2019 earnings before interest, taxes, depreciation and amortization (EBITDA).
New Loans Under MSNLF. An eligible loan under MSNLF is an unsecured term loan made by an eligible lender to an eligible borrower that was originated on or after April 8, 2020. The maximum loan size for that term loan is the lesser of (1) $25 million; and (2) an amount that, when added to the borrower’s existing outstanding and committed debt, would not exceed four times the borrower’s 2019 EBITDA.
Attestations and Restrictions. Both Main Street Lending programs require an eligible borrower to attest:
- that it will not use the proceeds of an eligible loan to repay other loan balances and will refrain from repaying other debt of equal or lower priority (other than mandatory principal payments) unless the borrower has first repaid the eligible loan in full;
- that it will not cancel or reduce any of its outstanding lines of credit with the eligible lender or any other lender;
- that it requires financing due the exigent circumstances presented by the COVID-19 pandemic, and that, using the proceeds of the eligible loan, it will make reasonable efforts to maintain its payroll and retain its employees during the term of the eligible loan;
- that it meets the applicable EBITDA leverage condition (i.e., four times EBITDA for MSNLF and six times EBITDA for MSELF); and
- that it will follow certain compensation, stock repurchase and capital distribution limitations described in the CARES Act.
The regulations to be adopted for these programs may impose significant consequences (including criminal consequences) for any fraud in making the required attestations.
CARES Act Stock Repurchase and Capital Distribution Limitations. Borrowers under the Main Street Lending programs must commit to the following important limitations. Until 12 months after the date on which the eligible loan is no longer outstanding, the borrower cannot:
- repurchase an equity security that is listed on a national securities exchange of the eligible business or any parent company of the eligible business while the eligible loan is outstanding, except to the extent required under a contractual obligation in effect on March 27, 2020; or
- pay dividends or make other capital distributions with respect to the common stock of the eligible business.
CARES Act Compensation Restrictions. The borrowers must also comply with limitations on executive compensation for employees paid over $425,000 with additional limits for those paid more than $3 million, as described below, until 12 months after the date on which the eligible loan is no longer outstanding.
- No officer or employee whose total compensation exceeded $425,000 in calendar year 2019 (other than an employee whose compensation is determined through an existing collective bargaining agreement entered into prior to March 1, 2020) will receive (A) total compensation over any 12 consecutive months that exceeds such person’s total compensation in calendar year 2019; or (B) severance pay or other benefits upon termination of employment that exceeds twice the maximum total compensation received by that person in calendar year 2019. “Total compensation” includes salary, bonuses, awards of stock and other financial benefits.
- No officer or employee whose total compensation exceeded $3 million in calendar year 2019 will receive during any 12 consecutive months total compensation in excess of the sum of (A) $3 million; and (B) 50% of the excess over $3 million of the total compensation received by the officer or employee from the eligible business in calendar year 2019.
For example, if an officer’s total compensation in 2019 was $5 million, while the loan is outstanding and for a year thereafter, that officer could not receive total compensation over $4 million ($3 million plus $1 million (50% x $2 million (i.e., $5 million – $3 million = $2 million))).
Loan Origination Fees: Borrowers must pay the lender an origination fee equal to 1% of the principal amount of an eligible loan.
Alternative Loans Under Paycheck Protection Program. Public companies with fewer than 500 employees may also borrow under the Paycheck Protection Program (PPP) administered by the U.S. Small Business Administration, which began accepting applications on April 3, 2020. Unlike the Main Street Lending programs’ loans, the PPP loans may be forgivable. See McGuireWoods’ legal alert “COVID-19 Paycheck Protection Loans for Businesses” for more information.
Next Steps for the Board of Directors and Senior Management
Companies considering borrowing under the Main Street Lending programs should undertake the following actions:
- Determine the amount of funding needed to operate the business for the immediate future (especially with respect to maintaining the business’s payroll and retaining its employees).
- Evaluate and discuss the extent to which financing under the Main Street Lending programs is necessary due to exigencies related to the COVID-19 pandemic.
- Analyze existing debt instruments to ensure compliance with notice, consent and covenant requirements; contact existing lenders as necessary.
- Contact potential lenders about alternative loan terms rather than borrowing under the Main Street Lending programs and compare terms of various loan alternatives.
- Identify employees with compensation above the limits, and take into account the limits with regard to any existing employment agreement or other compensation arrangement.
- Analyze the financial impact and stock price impact of eliminating dividends and share repurchase programs for the duration of the loan and for 12 months thereafter.
- Evaluate whether the liquidity of a Main Street Lending program loan outweighs the impact of the dividend, share repurchase and compensation restrictions imposed by the loan.
- Keep information about the company’s plans restricted to a narrow team of personnel since plans to borrow under the Main Street Lending programs would be considered material, nonpublic information. Trading windows should be closed under insider trading policies for personnel on the team.
- Provide the board with thorough analyses sufficiently in advance of the board meeting to help demonstrate the board’s exercise of due care (under applicable state law) in deciding whether to apply for loans under these government-sponsored programs.
Disclosure Issues for Consideration
If a company decides to apply for a loan under the Main Street Lending programs, it should promptly disclose that fact and its impact on the company’s plans for dividends, share buybacks and capital preservation. In an interview with CNBC on April 7, 2020, Securities and Exchange Commission Chairman Jay Clayton emphasized the importance of disclosing plans promptly and keeping information tight before the disclosures are made.
If it appears likely that it will apply for a loan under the Main Street Lending programs, the company should begin drafting disclosures for a press release announcing the borrowings, as well as for any required Form 8-K disclosure announcing the new loan and the upcoming Form 10-Q, including changes to the company’s Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and risk factors sections and the addition of any subsequent event discussion in the notes to the company’s financial statements. These disclosures should address, among other topics, the terms of the loan and restrictions on future dividends, share repurchases, liquidity and executive compensation programs. If the proxy statement has not been filed yet, companies should consider whether forward-looking discussions about executive compensation in the Compensation Discussion and Analysis sections may need to be updated to take into account the restrictions that would be imposed by a loan under the Main Street Lending programs.
Keep in mind the SEC Corporation Finance Division’s CF Disclosure Guidance Topic No. 9, which lists a series of questions to consider when disclosing how the company and management are responding to COVID-19 risks and effects. See McGuireWoods’ alert “SEC Continues to Roll Out Guidance and Exchange Act Filing Relief During COVID-19” for more information.
For additional guidance on the Main Street Lending programs and special considerations for public companies, please contact any of the authors below; McGuireWoods Main Street Lending program team members Staci Rosche (+1 704 373 8559), Mark A. Kromkowski (+1 312 849 8170) or Bryan P. Bylica (+1 312 750 3617); or your primary attorney at McGuireWoods. The McGuireWoods Securities & Capital Markets Department comprises more than 50 lawyers with particular experience in corporate governance and SEC disclosure considerations.
The firm’s COVID-19 response team stands ready to help clients navigate urgent and evolving legal and business issues arising from the COVID-19 pandemic. McGuireWoods has published additional thought leadership related to how companies across various industries can address crucial COVID-19-related business and legal issues.