Aprio’s FAQ on the Main Street Lending Program

Aprio’s FAQ on the Main Street Lending Program from the webinar Unpacking the New Main Street Lending Program Loans and Expanded Eligibility Requirements.

May 29, 2020

If we received a PPP loan, why would we consider this Main Street Loan?

The Main Street Loan is an additional source of capital to help businesses fund ongoing operations. The Main Street Lending Program (MSLP) is intended to help companies that were in sound financial condition prior to the onset of COVID-19 maintain operations and payroll until the situation stabilizes. Unlike the Paycheck Protection Program, the uses of the funds from the MSLP are not limited to payroll, rent, utilities and mortgage.

What about “insider debt” like back salary owed, to founders? Is this counted as debt in the same way as bank debt in the calculations?

Per the Federal Reserve (Fed) FAQ* issued on April 30, 2020, item G.2, “existing outstanding and undrawn available debt includes all amounts borrowed under any loan facility, including unsecured or secured loans from any bank, non-bank financial institution, or private lender, as well as publicly issued bonds or private placement facilities.” The term sheets do not specifically refer to “debt-like” items. We anticipate that these items will be considered by banks during the underwriting process and may be addressed by the Fed’s FAQs* released on April 30, 2020 and prior to the start date of the Main Street Lending Program.

I’ve heard that the MSLP is only for companies with employees of 500 or more. Can employees with less than 500 employees qualify?

Yes, businesses with less than 500 employees can apply. The size requirements for the MSLP are companies with 15,000 or fewer employees OR 2019 annual revenues of $5 billion or less. Businesses must meet at least one of these conditions but are not required to meet both. To determine how many employees a business has or a business’s 2019 revenues, the employees and revenues of the business must be aggregated with the employees and revenues of its affiliated entities.

Is there any guidance yet regarding the definition of 2019 EBITDA in terms of year-end? Is it the fiscal year ending in 2019 or will there need to be a calculation to carve out only calendar 2019?

The Fed does not explicitly state whether adjusted 2019 EBITDA will be measured based upon a fiscal or calendar year. Based upon guidance provided in the Fed’s FAQ* item E.4, the Fed indicates 2019 revenue will be measured on a fiscal year basis.

Regarding Affiliation: Are several LLC’s commonly owned but with individual EINs and independent P&Ls considered affiliates?

Yes, common ownership is an affiliation criterion. Legal counsel of borrow should also be consulted related to ownership structure and possible affiliations.

Will these slides be available for us to download today?

Slides have been provided with the webinar link and can be accessed on the Aprio website.

What happens if the affiliate company has no presence in the USA?

The SBA affiliation rules specify that affiliates include both domestic and foreign entities. Thus, when determining sizing requirements, a business should count the employees and revenues of both domestic and foreign affiliates. Note, the eligible borrower must be a business that was created or organized in the United States or under the laws of the United States with significant operations in and a majority of their employees based in the United States.

Is this program active? Meaning can you apply somewhere?

The Fed continues to engage with the Treasury and eligible lenders related to the final provisions of the MSLP. The program has not commenced and updates regarding the MSLP, including the official launch date, will be announced on the Fed’s website.

In terms of the MSPL, what period(s) may be used to calculate the EBITDA base for determining maximum loan proceeds for a borrower?

The maximum loan proceeds will be based upon 2019 adjusted EBITDA.

Can you refer us to the website/document that you were referencing about the PPP requirements? Was any of that specific to forgiveness?

You can find answers to questions about the Payment Protection Loan (PPP) and PPP forgiveness on the Aprio website.

What is the LIBOR rate to be used? Is it dependent on the actual loan term?

The LIBOR rate to be used will be the 1 or 3 months LIBOR rate plus 300 basis points.

Regarding loan amount, can a company with a negative 2019 EBITDA be denied a loan under this program?

The important consideration is that maximum loan sizes are based upon adjusted EBITDA rather than EBITDA reported. If a business has zero or negative EBITDA reported it is important to evaluate potential adjustments for non-operating and non-recurring items. Further, the Fed acknowledges that the credit risk of asset-based borrowers is generally not considered based on EBITDA. Based on the Fed’s FAQ*, they are evaluating the ability to adjust loan eligibility metrics for such asset-based borrowers.

Is the margin on LIBOR fixed by the federal government or does it vary by bank?

Each of the three programs’ interest rates are specified in the draft term sheet dated April 30, 2020 and set by the Fed as “adjustable rate of LIBOR 1 or 3 month + 300 basis points.” This will not vary by bank.

Is a business with an EBITDA of less than $83,333 ineligible for the Main Street Loan?

The important consideration is that maximum loan sizes are based upon adjusted EBITDA rather than EBITDA reported. If a business has less than $83,333 EBITDA reported, it is important to evaluate potential adjustments for non-operating and non-recurring items.

Can you apply for all programs: PPP, EIDL and MSLP?

Yes, a business that has received Paycheck Protection Program loans and/or Economic Injury Disaster Loans can also apply for and receive a Main Street Loan.

When will banks know whether they are participating?

Bank are still in the process of determining which of the three Main Street Lending Programs they will participate in. We expect that banks will announce their participation when the Fed announces the official launch of the program.

If top ownership is a PE firm, are affiliate employees worldwide or U.S. only (for part of the 15,000-employee count)?

The SBA affiliation rules specify that affiliates include both domestic and foreign entities. Thus, when determining sizing employee size requirements, a business should count the employees and revenues of both domestic and foreign affiliates.

Will the PPP loan be counted as debt in the leverage calculation?

We expect Paycheck Protection Program loans to be included in the existing outstanding debt.

For the measurement of debt, do we know if that should include intercompany debt and or lease liability?

Per the Fed’s FAQ* item G.2, “existing outstanding and undrawn available debt includes all amounts borrowed under any loan facility, including unsecured or secured loans from any bank, non-bank financial institution, or private lender, as well as publicly issued bonds or private placement facilities.” There are no references to intercompany debt or lease liabilities. However, these items may be considered as “debt-like” items during the eligible lender underwriting process which could impact borrowing amounts.

How much does the Fed guaranty versus the amount the banks have at risk?

This varies by program. For the Main Street New Loan Facility and the Main Street Expanded Loan Facility, the Fed’s Special Purpose Vehicle (SPV) will purchase a 95% participation while the eligible lender will retain 5% of the loan. For the Main Street Priority Loan Facility, the Fed’s SPV will purchase an 85% participation while the eligible lender will retain 15% of the loan.

Can you expand on the refinance of debt with the Priority Program? Could you refinance any debt that you have with that loan?

To the extent the proceeds from the Main Street Priority Loan Facility would cover the refinancing of existing debt owed, a business would have the opportunity to refinance the existing debt under the terms of the Main Street Lending Program. The term sheet dated April 30, 2020 language suggests that the loans being refinanced must be owed to a lender that is not the eligible lender of the MSLP loan.

Is a guarantor required?

No, a personal guarantee is not required.

Any possibility to use EBITDA numbers for the year ended 3/31/20?

No, the term sheets and Fed’s FAQ* document very specifically identify that borrowing will be based upon “adjusted 2019 EBITDA.”

Is MSL lending limited to traditional banks, or can SBA lenders like Newtek participate?

Eligible lenders include U.S. federally insured depository institutions including banks, savings associations and credit unions.

If I have an emerging company that has yet to achieve profitability, am I not eligible for these loans?

The important consideration is that maximum loan sizes are based upon adjusted EBITDA rather than EBITDA reported. If a business has zero or negative EBITDA reported, it is important to evaluate potential adjustments for non-operating and non-recurring items. We understand that eligible borrowers may have to provide eligible lenders, in connection with their customary underwriting process, financial models/projections.

What is the relationship between executive compensation and a sale of the business? (i.e. if a founder has an exit, will they violate the terms of the agreement if they earn, say, $5mm)

All three facilities under the MSLP have restrictions around compensation, stock repurchase, and capital distributions that apply under section 4003(c)(3)(A)(ii) of the CARES Act. Noticeably absent from these restrictions is a restriction on the sale of common or preferred shares. Certain transactions such as a dividend recapitalization may be limited, but a true sale of the business would not be prohibited by loan requirements.

When do eligible lenders most likely have enough guidance to receive borrower applications?

Eligible lenders are still in the process of determining which of the three Main Street Lending Programs they will participate in. We expect that banks will announce their participation when the Fed launches the program.

Are there still restrictions on capital distributions in the new term sheet?

Yes, there are still restrictions under the new term sheets. All three facilities under the MSLP have restrictions around compensation, stock repurchase, and capital distributions that apply under section 4003(c)(3)(A)(ii) of the CARES Act.

• 4003. Emergency Relief and Taxpayer Protections (C) Terms and Conditions (3) Federal Reserve Programs or Facilities (A) Terms and Conditions (ii) Restrictions
  • Until the date 12 months after the date on which the direct loan is no longer outstanding, not to repurchase an equity security that is listed on a national securities exchange of the eligible business or any parent company of the eligible business while the direct loan is outstanding, except to the extent required under a contractual obligation that is in effect as of the date of enactment of this Act;
  • Until the date 12 months after the date on which the direct loan is no longer outstanding, not to pay dividends or make other capital distributions with respect to the common stock of the eligible business; and
  • To comply with the limitations on compensation set forth in section 4004
    • Beginning on the date on which the agreement is executed and ending on the date that is 1 year after the date on which the loan is no longer outstanding:
      • No officer or employee of the eligible business whose total compensation exceeded $25,000 in calendar year 2019 (other than an employee whose compensation is determined through an existing collective bargaining agreement entered into prior to March 1, 2020):
        • Will receive from the eligible business total compensation which exceeds, during any 12 consecutive months of such period, the total compensation received by the officer or employee from the eligible business in calendar year 2019; or
        • Will receive from the eligible business severance pay or other benefits upon termination of employment with the eligible business which exceeds twice the maximum total compensation received by the office or employee from the eligible business in calendar year 2019; and
      • No officer or employee of the eligible business whose total compensation exceeded $3,000,000 in calendar year 2019 may receive during any 12 consecutive months of such period total compensation in excess of the sum of:
        • $3,000,000; and
        • 50 percent excess over $3,000,000 of total compensation received by the officer or employee from the eligible business in calendar year 2019.
    • Total compensation defined – the term “total compensation” includes salary, bonuses, awards of stock, and other financial benefits provided by an eligible business to an officer or employee of the eligible business.

Are we required to apply for an MSL through our depository bank or can we consider other possible lenders?

Eligible Lenders include U.S. federally insured depository institutions including banks, savings associations and credit unions. Banks are currently in the process of evaluating which if any of the three programs they will participate in. While you are not officially restricted to pursuing the MSLP with your existing bank, we do anticipate that may be the most efficient path forward as your existing lenders have knowledge of your business.

What if the majority of your debt is related to mortgages on real estate? Does that factor into the calculation?

Per the Fed’s FAQ* item G.2 “existing outstanding and undrawn available debt includes all amounts borrowed un any loan facility, including unsecured or secured loans from any bank, non-bank financial institution, or private lender, as well as publicly issued bonds or private placement facilities.” The term sheets do not exclude mortgage or real estate related debt from calculations.

When will applications for these loans be available?

The Federal Reserve has not announced the launch of the program. Updates regarding the Main Street Lending Program including the official launch date will be announced on the Fed’s website.

*The Federal Reserve FAQ released on April 30, 2020, as referred to above may be found here.

Does Aprio have resources to help my business plan for Main Street Lending Program?

Yes. If you have questions about the Main Street Lending Program that weren’t answered here, contact Aprio’s Main Street Lending Program Team for dedicated assistance.