Top 7 Myths about the Main Street Lending Program
The Federal Reserve created a new loan program to support companies who were in a strong financial position prior to COVID-19 impacts. It finalized terms for the Main Street Lending Program (“MSLP”) on April 30, 2020. Given the program is rolling out on the heels of the SBA’s Paycheck Protection Program (“PPP”), there are a lot of misconceptions about this new program. Make sure you understand the differences between the MSLP loan and the PPP loans as there are 7 common misconceptions.
Myth #1: MSLP loans are forgivable
Unlike the PPP loans, the Main Street Lending Program created term loans which are NOT forgivable and must be paid back with interest within four years. The interest rate for these loans is Libor + 300 which at the time of this publication is around 4%. However, interest and principal payments are deferred for the first year and then the amortization schedule depends on the specific loan facility.
Myth #2: Every bank will offer the MSLP loan
Cerebro has over 650 lenders on its debt placement platform and receives daily updates from its network. Some banks have already indicated they will not offer the Main Street Lending Program at all and others will only offer it in special case scenarios. Even though the Fed will be buying back 95%* of the loan, banks might still have too much risk in their current loan portfolio. Another 5% risk, although a smaller amount than they would normally carry, might still be too much incremental risk for the banks to underwrite. This will hold even more true for banks who have a significant amount of their portfolio in the hospitality industry. It will be important for borrowers to take their loan packages to multiple lenders in order to determine which will offer this loan for their company.
*For the Priority Loan, the Fed will only buy back 85% of the loan.
Myth #3: There will be a standard application form for the MSLP loan
Unlike the PPP loans which had a very standardized application process through the SBA, the Main Street Lending Program loans are underwritten in a decentralized way across eligible commercial banks. While interest rate, amortization, and term length are already defined other key metrics for underwriting will vary from bank to bank. In fact, some key components of eligibility such as EBITDA add backs will be defined per each individual bank’s underwriting procedures. This is another reason, it will be important for borrowers to seek multiple offers from lenders.
Applying for the Main Street Lending Program will be a very similar process to applying for a term loan of this size prior to COVID-19. It will require a company to compile a data room of documentation including full financial statements, projection model, AR & AP agings reports, tax returns, appraisals, etc. And the underwriting process will likely take a few weeks plus another few weeks of diligence and closing documentation. All in all a company should expect to receive funding about 2-3 months after they begin the MSLP loan process.
Myth #4: Every eligible business should apply for the MSLP loan
Because this loan was created to assist businesses during and after the COVID pandemic, the Federal Reserve created specific restrictions on companies that take advantage of the MSLP loan. For example, borrowers who accept funds under the Main Street Lending Program will not be able to make distributions 12 months following the repayment of the MSLP Loan. This is done to ensure that the funds are truly used for investing in growing or maintaining the business operations, and not for the direct enrichment of the company owners. This means that businesses should strongly review all the restrictions and ensure that the benefits of taking the MSLP loan will outweigh the restrictions.
Myth #5: Every eligible business will get approved for the MSLP loan
Because the banks are carrying some risk with these loans, and the interest rate is much lower than other loan programs, banks will likely be very selective in underwriting. In fact the businesses most likely to receive these loans will be those who put together a holistic loan package and can offer additional ancillary services. Banks traditionally have required corporate borrowers to use their checking accounts and treasury management services when providing term sheets. The Main Street Lending Program could be used as incentive for desirable companies to leave their incumbent bank entirely.
Midsize companies with strong balance sheets, positive EBITDA over $1MM and large treasury management needs are likely going to be prioritized. Regardless, the best way for a company to increase its chances of receiving this loan will be to run a competitive RFP process with a completed loan underwriting package and a focused loan narrative.
Myth #6: Businesses should wait and see what happens before applying
False. There is an advantage to start preparing loan packages now. The Federal Reserve released the term sheets for the three credit facilities under MSLP on April 30, 2020. However, as of the date of this publication the special purpose vehicle (“SPV”) had not been created in order to buy back a portion of the loans from the banks. Because of this delay, many companies assume they should wait before starting the process. But there is no need to wait. As was proven with the PPP loans, there is an advantage for companies to be in the front of the line. And while the funds for MSLP will likely not run out as quickly as the PPP, the banks will still be constrained by bandwidth and may choose to cap the number of loans they offer within certain regions or industries. Additionally, the entire process will likely take two to three months for a company to receive the funds. And the MSLP loan will no longer be available after Sept. 30, 2020 which means companies should apply well before the end of June to safely have enough time.
Editor’s Note: The Federal Reserve recently updated the program deadline to Dec. 31st, 2020.
Myth #7: Private Equity owned companies do not quality for MSLP loans because of affiliation rules
Many Private Equity owned companies were not eligible for PPP loans because of the SBA’s strict affiliation rules, but MSLP loans are different. The MSLP Affiliation rules require the affiliated group to consolidate their EBITDA and their total debt. If the consolidated 2019 cash flow leverage (total consolidated debt / total consolidated EBITDA) is 6x or less then the affiliated group could be a good fit for the MSLP so long as the consolidated head count is less than 15,000 and the consolidated revenues are less than $5 billion for 2019. Companies are considered affiliated and will need to be grouped together if they have a common owner with a controlling interest of 50% or more. Many portfolio companies of PE firms and VC firms that were ineligible for PPP loans should reevaluate to see if they may be eligible for MSLP loans.