While much has been written over the last several months about the Paycheck Protection Program (“PPP”) and the Economic Injury Disaster Loan Program (“EIDL”) administered by the Small Business Administration through the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, there are other important programs under the CARES Act that are available to many businesses.
The USDA and Mainstreet Lending Programs are distinct from the PPP and EIDL programs in that they are intended to be short/mid duration commercial term loans originated by lenders with no Borrower loan forgiveness contemplated. Both programs are intended to serve small and middle market businesses that may not have the access to direct capital markets and balance sheet bank loans and should be an attractive alternative (or compliment) to non-bank financing.
USDA CARES Act Loan Program
On May 22nd, the US Department of Agriculture (USDA) announced a temporary new loan program for businesses located in rural areas of the country as an extension of its Business & Industry (B&I) loan program. Like the PPP program, the USDA B&I CARES Act loans are working capital loans. Businesses, of any size and industry located in a qualifying rural area are eligible, including non-profits aside from a few exceptions. These include certain business types covered by other USDA programs (agriculture production, owner occupied and rental housing), certain financial institutions, larger projects that involve relocation of significant jobs and other businesses typically excluded from B&I lending (golf courses, racetracks or gambling facilities, religious and charitable organizations). The program is available until September 30, 2021 or until funding runs out.
- USDA CARES Act Loan Program, Federal Register Rules and Regulations
- Main Street Lending Program, Federal Reserve Press Release
- ¹ Moody’s, Moody’s Seasoned Baa Corporate Bond Yield [DBAA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DBAA, June 10, 2020. 2020-06-09: 3.64
These loans can be fairly large working capital loans to be used to “cure problems caused by the COVID-19 emergency so that the business is reestablished on a successful basis,” according to the USDA. These loans are not for expanding the business or refinancing other debts. The maximum loan amount is the lesser of twelve months of total working capital (not just payroll) or $25 million, less any PPP/EIDL funds received. This program also extends the term and offers principal and interest payment deferral opportunities unique to this USDA program.
Borrowers should note that this USDA B&I CARES Act loan program does not contemplate loan forgiveness and the Borrower must show repayment ability to the lender as part of its underwriting, as it is intended to be a commercial loan. In addition to rural location requirements, there are also restrictions on the uses of funds “as working capital to prevent, prepare for or respond to the effects of the coronavirus pandemic.” In other words, not for acquisitions, real asset investment, refinance, etc. Borrowers will likely need to develop a pro forma financial model for the lender to illustrate this working capital need and use of funds.
Also, the program requires that the lender must be adequately secured by collateral and have at least ten percent balance sheet equity and possible personal guarantee by the Borrower’s owners. Additionally, like traditional commercial loans, the interest rate will be determined by the lender.
This loan program could be useful for a wide range of rural for-profit and nonprofit organizations that have been affected by COVID-19 that are perhaps not a balance sheet bank loan prospect at this time. We expect this program to be lender-driven, with underwriting likely not as streamlined as PPP. The 90% USDA guarantee should be attractive to traditional government-guaranteed lenders. Given the September deadline, rural-based businesses would do well to learn more about the program soon.
Main Street Lending Program
The Federal Reserve has taken a number of actions in an effort to maintain credit availability and liquidity in the midst of COVID-19, including some unprecedented activities in primary corporate credit markets and in the “Main Street Lending Program” presented in Title IV of the CARES Act.
On June 8th, the Fed clarified several aspects of the Main Street Lending Program which, like the USDA CARES Act loan program, is comprised of lender-driven commercial loans that will be purchased by the Fed post-origination. This program has three types of conforming loans:
- Main Street New Loan Facility (NLF),
- Main Street Priority Loan Facility (PLF) and
- Main Street Expanded Loan Facility (ELF).
All of these loans are limited to for-profit businesses with under 15,000 employees or $5 billion in revenue (subject to affiliate rules) for U.S. operations only (note that the Fed is currently developing a Main Street program for nonprofits as well, with details to be announced).
These loans offer an attractive interest rate (LIBOR plus 300 basis points, a lower rate, for example than the Moody’s Seasoned Baa Corporate Bond Yield¹) for businesses that are unable to obtain attractive credit otherwise.
Further, the Main Street loans do not explicitly require personal guarantees and have generally very few restrictions on uses of proceeds (except for the inability to refinance other non-maturing debt under the NLF and ELF). They also offer early years principal and interest and amortization deferral possibilities and no prepayment penalty.
The loan sizes vary by program:
- NLFs can be as small as $250,000 with a maximum equal to the lesser of $35 million or 4.0x adjusted EBITDA less current debt;
- PLFs can also be as small as $250,000 with a maximum equal to the lesser of $50 million or 6.0x adjusted EBITDA less current debt;
- The ELF is basically a “follow-on” program for current borrowers., The loans range between $10 million on the low end to a maximum equal to the lesser of $300 million or 6.0x adjusted EBITDA less current debt.
Like the USDA CARES Act program, there is not a mechanism for loan forgiveness. Main Street loans will be bank-underwritten, commercial loans of which 95% will be repurchased by the Fed. Also, these loans are available only to for-profit businesses that were active before March 13, 2020 and are of short tenor – five years – with significant reporting requirements.
In addition to debt refinance limitations, there are also seniority and bankruptcy priority restrictions attached to these programs that will likely require interaction with existing lenders (though the NLF program has a little more flexibility). Further, though not as defined or specific as the PPP program, the Mains Street loans require borrowers to use “commercially reasonable efforts to maintain its payroll and retain its employees.” Borrowers should also note that the Main Street program imposes certain limitations on executive compensation, stock repurchase and other restrictions during loan term and for period thereafter in some cases.
Like the other CARES Act programs, there is currently a short window of availability that ends on September 30, 2020. With lenders just now reaching full awareness and deciding whether or not to participate in the Main Street program it will be interesting to see if this loan program ends up being extended like other COVID-19 relief programs. The general consensus seems to report a lack of interest from insured depository institutions, the only eligible lenders thus far, so it seems likely there will be further developments.
The utility of this program will depend on bank participation. It should be a good alternative to other government-guaranteed loan programs for small and middle-market sized businesses that have reasonable EBITDA but may not be a balance sheet loan candidate for banks.
Both of these new programs are attractive options for businesses that may need alternative financing to recover from COVID-19 working capital hardship. Please contact Frazier & Deeter to learn more about the Main Street or USDA CARES Act programs and how it might benefit your business. We can also assist clients with developing financial models, Adjusted EBITDA calculations, loan procurement as well as tax, audit and advisory services related to these and other finance programs.