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April 20, 2020

COVID-19: Assistance for Mid-Sized Businesses Under the CARES Act

While small businesses are primarily focused on their ability to receive relief under the Paycheck Protection Program, relief available to mid-size businesses is now getting its time in the spotlight. The recently released Main Street Lending Program is the umbrella under which three new lending programs have been established, with two programs focused on mid-sized and a third aimed at helping larger companies.

Both the Main Street New Loan Facility (MSNLF) and the Main Street Expanded Loan Facility (MSELF) are available to US entities, including not-for-profits, with significant operations in and a majority of their employees based in the United States with less than 10,000 employees or up to $2.5 billion in 2019 annual revenues. Although borrowers must choose to participate in either the MSNLF or the MSELF under the Main Street Lending Program, they can participate in either option and the Paycheck Protection Program and can also receive an Economic Injury Disaster Loan as long as they meet the requirements for each program.

Both the MSNLF and the MSELF are loans that:

  1. Have a four-year maturity
  2. Defer the amortization of principal and interest for one year
  3. Have a minimum loan size of $1 million
  4. Provide for no prepayment penalties
  5. Have an adjustable interest rate of secured overnight financing rate plus 250 to 400 basis points

The main differences between the programs are whether the borrower is receiving a new loan or upsizing an existing loan and what the maximum loan amount available is. New loans were originated on or after April 8 and have a maximum amount of the lesser of $25 million or an amount that, when added to the eligible borrower’s existing outstanding and committed but undrawn debt, does not exceed four times the eligible borrower’s 2019 earnings before interest, taxes, depreciation, and amortization (EBITDA). Expanded loans were originated before April 8 and have a maximum amount of the lesser of $150 million, 30 percent of the eligible borrower’s existing outstanding and committed but undrawn bank debt, or an amount that, when added to the eligible borrower’s existing outstanding and committed but undrawn debt, does not exceed six times the eligible borrower’s 2019 EBITDA.

Any business wishing to take advantage of either loan facility under the Main Street Lending Program must make good-faith certifications as laid out in both the CARES Act and in the applicable term sheet for either the MSNLF or the MSELF. Most significantly, and among other certifications, borrowers must certify that:

  1. The current economic uncertainty requires the loan to support the ongoing operations of the company
  2. The funds will be used to retain at least 90 percent of the workforce at full compensation and benefits until September 30
  3. The company intends to restore no less than 90 percent of the workforce that existed on February 1 and to restore all compensation and benefits to workers no later than four months after the termination date of the public health emergency declared by the Department of Health and Human Services secretary on January 31 in response to COVID-19
  4. The company is not a debtor in a bankruptcy proceeding
  5. The company will not outsource or offshore jobs for the term of the loan and two years after
  6. The company will not abrogate existing collective bargaining agreements for the term of the loan and two years after repayment
  7. The company will remain neutral in any union-organizing effort for the term of the loan
  8. The company will not seek to cancel or reduce any of its outstanding lines of credit with the eligible lender or any other lender
  9. The company will commit to refrain from using the proceeds of the eligible loan to repay other loan balances or from repaying other debt of equal or lower priority
  10. The company will follow compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under the CARES Act

The compensation, stock repurchase, and capital distribution restrictions under the CARES Act are as follows:

  • Borrowers must agree that:
  1. Until one year after the date on which the loan is no longer outstanding, not to repurchase an equity security that is listed on a national securities exchange of the business or any parent company of the business while the loan is outstanding, except to the extent required under a contractual obligation that was in effect as of March 27
  2. Until the one year after the date on which the loan is no longer outstanding, not to pay dividends or make other capital distributions with respect to the common stock of the business
  3. They will comply with limitations on compensation as set forth in Section 4004 the CARES Act
  • Beginning on the date on which the loan or loan guarantee agreement is executed and ending on the date one year after the loan is no longer outstanding, no officer or employee of the borrower whose total compensation exceeded $425,000 in 2019 will receive from the company any increase in compensation from that received in 2019 during any 12 consecutive months during such period or will receive severance or other termination benefits from the company in an amount exceeding twice the maximum total compensation received by such officer or employee in 2019.
  • Additionally, beginning on the date on which the loan or loan guarantee agreement is executed and ending on the date one year after the loan is no longer outstanding, no officer or employee of the borrower whose total compensation exceeded $3 million in 2019 may receive total compensation during any 12 consecutive months in such period in excess of the sum of $3 million plus 50 percent of the excess over $3 million of the total compensation received by an officer or employee from the company during 2019.

Total compensation is defined as salary, bonuses, awards of stock, and other financial benefits provided by the company to such officer or employee.

This summary is based on an initial review of available information. Various important points remain unclear, such as the implementation of any affiliation rules, and the terms of the loan program and their interpretation are likely to change and evolve as the program is implemented. As a result, most banks are not yet lending under this program. Although this program is open, we aren’t expecting to see an increase in lender participation until further guidance is available.

If you have any questions regarding the content of this alert, please contact Roger Cominsky, Financial Institutions & Lending Practice Area chair, at rcominsky@barclaydamon.com; Danielle Katz, associate, at dkatz@barclaydamon.com; or another member of the firm’s Financial Institutions & Lending Practice Area.

We also have a specific team of Barclay Damon attorneys who are actively working on assessing regulatory, legislative, and other governmental updates related to COVID-19 and who are prepared to assist clients. You can reach our COVID-19 Response Team at COVID-19ResponseTeam@barclaydamon.com.

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