Legal Alerts

COVID-19 Response: The Federal Reserve and Treasury Announce $1.1 Trillion in COVID-19 Relief Loan Programs for Small & Mid-Size Businesses, and States & Municipalities

Washington, D.C. (April 10, 2020) - The Federal Reserve and the Department of the Treasury announced two new loan programs on April 9, 2020, under the spending authority granted by the CARES Act. First, the Main Street Lending Program (MSLP), which has two variations, will facilitate loans to small and mid-size businesses by providing up to $600 billion in funding. Eligible businesses include those with fewer than 10,000 employees or annual revenues below $2.5 billion. The program allows lenders to initiate new loans or increase the size of existing loans to borrowers. In the second program, states and municipalities will receive the benefit of a $500 billion Municipal Liquidity Facility (MLF) that will assist state and local governments with cash flow pressure to continue serving households and businesses in their communities. 

1. Loans for Small and Mid-Sized Businesses

The MSLP will use U.S. insured financial institutions, U.S. bank holding companies, and U.S. savings and loan holding companies to issue loans to eligible businesses that were in good financial standing before the crisis, but now require financing due to the exigent circumstances presented by the COVID-19 pandemic. The MSLP provides for two types of loans: those for new borrowers – the Main Street New Loan Program (MSNLP) – and the companion Main Street Expanded Loan Facility program (MSELF), which allows existing borrowers to increase their loan amount. 

Although the program was expected to apply only to mid-sized businesses with 500-10,000 employees, the Federal Reserve expanded the range to include small businesses with fewer than 500 employees as well. The result is that private-equity backed companies with fewer than 500 employees that were not eligible for the Paycheck Protection Program because of Small Business Administration regulations will be eligible for this program. Further, those borrowers that are participating in the Paycheck Protection Program for small businesses are also eligible for these additional loans. 

The Federal Reserve will accept public comments on the program until April 16, which raises the possibility that program details will change. In all likelihood, loans under the program will not initiate until at least May 1. 

  • All MSNLP and MSELF loans will have the following terms:
  • Up to four-year term;
  • Adjustable rate of SOFR + 250-400 basis points;
  • Principal and interest payments will be deferred for one year;
  • Prepayment without penalty; and
  • Minimum loan size of $1 million.
  • The MSNLP will have a maximum loan size that is the lesser of (i) $25 million or (ii) an amount that, when added to the borrower’s existing outstanding committed but undrawn debt, does not exceed four times the borrower’s 2019 earnings before interest, taxes, depreciation, and amortization.
  • MSELF loans will have a maximum loan size that is the lesser of (i) $150 million, (ii) 30% of the borrower’s existing outstanding and committed but undrawn bank debt, or (iii) 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 earnings before interest, taxes, depreciation, and amortization.

Borrowers and lenders will be required to make certain attestations, including:

  • Not using the funds to refinance or pay off existing loan balances;
  • Committing to make reasonable efforts to maintain payroll and retain workers; 
  • Restrictions on employee and executive compensation, stock repurchases and the issuance of dividends during the term of the loan and for a period of time after the loan is fully repaid.

2. Help for States, Counties, and Cities

Under the MLF program, a Federal Reserve Bank will create a special purpose vehicle (SPV) that will provide up to $500 billion to purchase short-term notes from these governmental entities. By purchasing these notes, the Federal Reserve will free up lending sources that states and local government can tap into for cash flow to manage essential and emergency services. 

Some of the criteria for providing funding under the MLF include:

  • Eligible Issuers include all states and the District of Columbia, cities, and counties;
  • Counties must have a population of at least two million residents and cities must have population of at least one million residents;
  • An Eligible Issuer may use the proceeds of Eligible Notes purchased by the SPV to help manage the cash flow due to the impact of COVID-19;
  • Eligible Issuers may use the proceeds of the notes purchased by the SPV to purchase similar notes issued by, or otherwise to assist, political subdivisions and instrumentalities of the relevant state, city, or county;
  • Only one issuer per state, county, or city is eligible;
  • Relevant legal opinions and disclosures will be required as determined by the Federal Reserve prior to purchase of Eligible Notes; 
  • The SPV will cease purchasing Eligible Notes on September 30, 2020, unless otherwise extended by the Federal Reserve and Treasury.

These programs provide new funding options to entities that previously were not eligible to participate in the other COVID-19 relief packages. In particular, the inclusion of businesses with fewer than 500 employees in the Main Street Lending Program is designed to provide liquidity to small businesses that were not eligible to participate in the Paycheck Protection Program or the Economic Injury Disaster Loan program. Its terms are also broad enough that borrowers with riskier balance sheets can tap into the program. The MLF acknowledges the strain on local government budgets caused by decreased economic activity, reduced tax revenue, and unanticipated COVID-19 related expenses by providing quick financial relief.

As those seeking relief under previously announced COVID-19 programs have discovered, the CARES Act provisions were hastily written and can be challenging to interpret and apply. The federal agencies administering these programs are struggling to keep up, and new regulations and guidance are appearing frequently, even while the programs are going into effect. Businesses seeking to take advantage of these important new programs should pay close attention to the rapidly changing rules of the road, and consult with counsel as appropriate in order to maximize their chances of achieving optimal results.

We will continue to keep you updated as these regulations evolve. Visit our COVID-19 Response Resource Center to find earlier alerts on this topic.


Katherine I. Funk, Partner

Thomas A. Brooks, Partner

Jane C. Luxton, Partner

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