CARES Act Relief for Larger Businesses
April 20, 2020
By: Gil B. Selinger
In recent developments under the CARES Act, the Department of the Treasury has turned its focus to companies that do not qualify for the Payroll Protection Program (PPP) either due to their number of employees, or failure to meet the alternative size test basted on net profits of the Company. Three new loan programs, and three expanded, already existing programs, with authorized capital of $2.3 Trillion were recently released. One of the programs is designed for institutional lenders (Paycheck Protection Program Liquidity Facility), and one is designed for governmental bodies that need cash flow relief (Municipal Liquidity Fund), and will not be addressed by this update. If you have specific questions about these two programs, please reach out to the attorneys at Fairfield and Woods for guidance.
The first new program, and the focus of this update, which connects to already existing SBA Lending Programs, expands the Main Street Lending Programs which historically have only been for small businesses for loans between $5,000 and $50,000, with character based lending criteria, by creating the Main Street New Loan Facility (MSNLF) and the Main Street Expanded Loan Facility (MSELF), with total available funds of $600 Billion. These programs will be administered through banks, who can initiate new loans or increase the principal size of existing loans for mid to large size businesses who were in good financial status prior to the current economic climate resulting from the global COVID-19 pandemic. As long as a business has less than $2.5 Billion in annual revenues from 2019 or has less than 10,000 employees, they will be eligible for these programs.
Interests rates for these loans will be very low, based on the current Secured Overnight Financing Rate (SOFR) (currently 0.01%) plus between 250 and 400 basis points. All loans will have a 4 year maturity, and will have a minimum loan amount of $1,000,000. MSNLF loans have a maximum value of $25 Million but are capped at 4x 2019 EBITDA for the Borrower. MSNLF loans have a maximum value of $150 Million but are capped at 6x 2019 EBITDA for the Borrower.
There are multiple restrictions on the use of proceeds, one of the most important of which is limiting a Borrower’s ability to use the funds to pay down other existing debt. Additionally, there are certain conflicts of interest rules that must be followed and the Borrower will be required to affirm that it needs the funds as a result of the COVID-19 crisis. While more lenient than the requirements of the PPP, Borrowers will still be required to minimize reductions in work force or large reductions in compensation. But since these requirements are not tied to forgiveness, as MSNLF and MSELF loans are traditional loans and do not contain forgiveness provisions, there is more flexibility for a Borrower.
The three revamped and renewed lending programs are the Primary and Secondary Market Corporate Credit Facilities (PMCCF and SMCCF) and the Term Asset-Backed Securities Loan Facility (TALF), which together will permit up to $850 Billion in additional credit availability. PMCCF and SMCCF will allow the purchase of bonds to permit additional lending to companies. New issuances of bonds will have certain limitations including dollar value caps, and bond rating requirements. TALF, which was originally created following the financial crisis in 2008, will issue asset-backed securities collateralized by certain specific types of loans, which certain requirements about the quality of the collateral.
Each of these new, or renewed programs will appeal to certain businesses who were not eligible to participate in some of the initial programs under the CARES Act, allowing them access to capital to weather this difficult climate. As with all of our updates regarding the CARES Act and the COVID-19 crisis, the laws and guidance thereon are constantly changing and being revised. If these programs appeal to you or your business, please reach out to the attorneys at Fairfield and Woods with additional questions or for help determining eligibility, the process to apply, or any other questions you may have.