On the Front Line with the Main Street Lending Program

Mid-Market Lending Insights

Allan Smallwood, CFA

Sr. Director of Capital Markets
Cerebro Capital

The Federal Reserve’s new Main Street Lending Program (MSLP) was created by the CARES Act in late March. But it’s taken well over two months for details to be rolled out that would help both lenders and borrowers understand how they can participate in the program. The latest update, released June 8th, provides further refined details on loan options available for this program.

Over the past month, Cerebro Capital has fielded hundreds of requests from middle market corporate borrowers and private equity firms that are interested in the Main Street Lending Program. Not only has our team worked with borrowers to understand if they qualify for the program, we have also been systemically scanning our 650+ lender network to determine which institutions are participating and to what degree.

Cerebro’s real-time market intelligence also allows us to explain the difference between MSLP and other debt solutions, which can help borrowers find the ideal lender and terms for their business structure.

From our “on the front lines” perspective, here is what borrowers should know:

1. Demand exceeds supply.

Similar to the roll out of the Payroll Protection Program (“PPP”), lenders have been slow to determine whether they are likely to participate. The biggest impediment has been a clear understanding of risk and reward. Lenders are struggling to understand what, if any, liability they may face issuing a loan under the program. Given that the economics of the loan are heavily reliant on the Fed’s participation, the risk of an error is extreme.

2. Structures have been simplified with the updated guidance on June 8th - likely at the behest of lenders.

Initial guidance on the program created material differences in loan facilities – for both borrowers and lenders. Most importantly there were material differences in amortization and risk retention. With the updated guidance, lenders now have uniform and more favorable parameters in both of these domains. These new guidelines should further incentivize participation.  

3. Participating lenders will not be made publicly available.

While lenders who wish to participate in the program are required to register with the Federal Reserve Bank of Boston (the program administrator), their identities will remain undisclosed. Cerebro has received this indication via a direct inquiry to the Administrator. Much like PPP, this will create a lack of transparency in the market for borrowers and create information asymmetries.

Editor’s note: after publishing, the Federal Reserve enabled a lender list for MSLP.

4. More favorable lender terms, including increased loan tenor and additional loan size options should increase the willingness of lenders to participate in MSLP.

Loans will still go through lender’s underwriting requirements, which may differ from bank to bank.  

5. Uniform amortization structures allows borrowers to retain more cash in the early years of the loan.

For borrowers facing uncertainty in near-term economic conditions, all MSLP loan types should provide more flexibility with loan payments under these new conditions. 

6. Borrowers can now refinance old debt using MSLP.

The June 8th update to the MSLP guidelines now allows Borrowers to refinance up to $50 million in existing debt through the Priority Loan Facility. This will be very attractive to borrowers who have expensive debt or debt that is maturing within the next 12 months. Now is a good time to identify whether there are lenders that can offer lower interest rates or better terms than your existing lenders. 

7. Package your narrative and financials now, so you can be at the front of the line with lenders.

Just because a bank may participate in the MSLP program does not mean that they will offer it to every company that is eligible. Banks are using a traditional full underwriting process to qualify borrowers for the program. Banks are being very selective about which borrowers they take on because they will hold some of the risk of these loans. Understanding how banks make decisions and crafting a clear loan narrative will be critical to getting access to the MSLP program.

8. Lenders are showing a particular interest in funding loans for medical/dental practices, B2B SaaS companies, and industrial manufacturers.

This does not exclude other industries, as long as the revenue and debt obligations are met. 

As a reminder, Main Street loans are true loans and are not forgivable, a distinct difference to other COVID-19 related financing relief provided in the CARES Act, such as the Paycheck Protection Program.

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