While the Payroll Protection Program (PPP) loans have gotten lots of publicity, lost in the shuffle is another new loan program from the federal government meant to help during the pandemic. It is called the Main Street Lending Program (MSLP).
While the Small Business Administration has long made available a variety of loan programs and supplemented these with the PPP loans, MSLP loans are provided by the Federal Reserve via participating lenders. This is the first time the Federal Reserve has made loans to businesses. Why start now? Because these are extraordinary times. The feeling was that while some huge industries have been given bailouts and PPP loans helped small businesses, the middle market has been underserved. Borrower eligibility is up to 15,000 employees, the majority of which are in the U.S., or annual revenues of $5B or less.
MSLP loans are real loans; they are not forgivable. The best candidates for these loans are a business that did well in 2019, was impacted by Covid-19, will come back after the pandemic, but could use some additional capital to get from here to there.
There are three MSLP types of credit facilities: New Loans (MSNLF), Priority Loans (MSPLF) and Expanded Loans (MSELF). The MSNLF loans are limited to the lesser of $35 million or 4x 2019 adjusted EBITDA. The MSPLF loans go up to $50 million and 6x EBITDA and the MSELF loans are also up to 6x EBITDA but with a $300 million cap. Minimum loan size is $250,000. Recently added are similar programs for not-for-profits.
The program became effective April 30, 2020. Unlike the PPP loans, not all banks are participating in the MSLP. But there are nine banks in the state of WA who are participating for new borrowers, and other banks that will support their existing customers. These banks include both large national banks and smaller regional financial institutions.
All these loans will have five-year terms, with principal and interest deferred for the first year, and priced at LIBOR +3%. The loans do come with a number of restrictions in terms of compensation, stock repurchases, capital distributions and dividend limits, and these restrictions are for the term of the loan plus one additional year. Typically, these loans work best for operating companies, as the credit facility is a 5-year term loan, typically with a balloon payment. The loans are not ideal for financing real estate, though real estate is not specifically prohibited.
The Federal Reserve has set up a Special Purpose Vehicle (SPV) which will assume 95% of the risk on these loans while the originating bank will retain the other 5%. The SPV will stop making loans December 31 2020, unless the program is extended.
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