The Fed’s Main Street Lending Program: Fitting Relief for Fintechs and Nonbank Lenders?

The Federal Reserve Board’s recently announced the Main Street Lending Program, intended to provide financing for a range of small and mid-sized businesses, may provide much needed federal relief for fintech firms and nonbank lenders that has otherwise been lacking.  

These firms generally have not qualified for the federal assistance efforts to date. The Fed designed its initial wave of programs — such as the Primary Market Corporate Credit Facility (PMCCF) and Secondary Market Corporate Credit Facility (SMCCF) for companies with investment-grade credit, or programs for companies involved in the broad commercial paper and money markets or certain securitizations — for larger, well-established corporations. At the other end of the spectrum, the Payroll Protection Program (PPP) is tied to preexisting Small Business Administration eligibility standards. Businesses “engaged in lending,” which includes finance companies, factoring companies, and “other business whose stock in trade is money,” generally are ineligible for the PPP.[1] Even if that eligibility rule were not a showstopper, many fintechs and nonbank lenders, particularly portfolio companies of private equity or venture capital funds, are precluded from the PPP by the SBA’s broad “affiliation rule,” which provides, for example, that applicants must include the number of employees of each of its affiliates.[2]

While the Fed has yet to provide all of the details regarding the Main Street Lending Program, as the program has been announced to date, it has no such obvious preclusions to eligibility. Businesses with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues qualify, as long as they are created or organized in or under the laws of the U.S., with significant operations in and a majority of their employees based here. Borrowers must attest that they require financing due to the exigent circumstances that the Covid-19 pandemic presents. Programs such as this, created under the Fed’s authority under section 13(3) of the Federal Reserve Act, generally require a certification of solvency, but there is a suggestion in the Fed’s press release that the standard under the Main Street program will be that the borrower was “in good financial standing before the crisis.”[3]

Loan Programs

The Main Street program will extend up to $600 billion through two distinct facilities: the Main Street New Loan Facility (MSNLF), designed to facilitate new loans to eligible businesses, and the Main Street Expanded Loan Facility (“MSELF”), intended to facilitate the extension and upsizing of preexisting loans. Borrowers can participate only in one of the two programs (and only one of these programs or the PMCCF).[4]

Loan Size. All Main Street loans will have a minimum size of $1 million. The maximum under the MSNLF is the lesser of $25 million or an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed four times the borrower’s 2019 EBITDA. The maximum MSELF loan, which must relate to an underlying eligible loan made on or before April 8, 2020, is the lesser of (i) $150 million, (ii) 30% of the eligible 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 six times the borrower’s 2019 EBITDA. The EBITDA calculation method is not specified in the Fed’s term sheets.

Other Loan Terms. The loan term is four years with amortization of principal and interest payments deferred for the first year. The interest rate will be based on the Secured Overnight Financing Rate (SOFR) plus a margin ranging from 250 to 400 basis points. (At the time of this writing, SOFR is near zero: 0.02%.) Borrowers will pay an origination fee equal to 100 basis points of the loan principal. There are no prepayment penalties.

Other Conditions. Main Street Lending Program assistance does come with some conditions. Borrowers must make “reasonable efforts” to use the loan proceeds to retain their employees and maintain their payroll during the term of the loan. In addition, loan proceeds cannot be used to repay other loan balances, and the borrower must commit to refrain from repaying other debt of equal or lower priority, with the exception of mandatory principal payments, until the Main Street loan is repaid in full. For the term of the loan and one year beyond, stock repurchase, dividend, and compensation restrictions apply. As an example of the compensation-related constraints, no officer or employee of the borrower whose total compensation exceeded $425,000 in 2019 may receive total compensation during any 12-month period exceeding his or her total compensation in 2019. Borrowers also must attest that they meet the respective program’s eligibility requirements, specifically including the applicable EBITDA leverage condition described above. 

Program Execution

Like the PPP, loans will be made and serviced by U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan institutions, and for MSELF, the underlying pre-existing loan must have been made by such a U.S. bank. Underwriting standards beyond the basic eligibility criteria described above have not yet been established. The banks will retain a 5 percent share of the loans and participate the remaining 95 percent to the Main Street facility special-purpose vehicle, with risk shared on a pari passu basis. Banks must certify that loan proceeds will not be used to repay or refinance pre-existing loans or lines of credit made by the bank to the borrower, and any existing lines of credit outstanding to the borrower cannot be reduced or cancelled. In addition to the borrower-paid origination fee, banks will be paid an annual servicing fee by the SPV of 25 basis points of the principal amount of its participation in the loan.[5]

The SPV will cease purchasing participations in loans on September 30, 2020, unless the Fed and the Treasury Department extend the facility. The Fed will continue to fund the SPV after that date until the SPV’s underlying assets mature or are sold.

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While the Main Street Lending Program, relative to the PPP, has more flexible eligibility standards that will be more suitable to many fintechs and nonbank lenders, the tradeoff is that the financial terms of the available loans will be closer to market standards. (By way of comparison, the rate on PPP loans is 1 percent and up to 100 percent of principal can be forgiven.) In addition, prospective Main Street loan applicants must weigh the impact of compensation, stock repurchase, and capital distribution restrictions.

If you have any questions regarding the Main Street Lending Program or other related issues, please contact an Orrick attorney with whom you have worked in the past.