On July 6, 2020, the Main Street Lending Program (MSLP), which was authorized under the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide credit support to small and midsize businesses, became operational, three months after the Federal Reserve’s initial proposal.

As summarized in our previous alerts [see May 1 and June 12], the MSLP will make available up to $600 billion in liquidity to eligible lenders (principally, banks and savings associations) that will provide direct loans to eligible borrowers. A special purpose vehicle established by the Federal Reserve (Main Street SPV) will buy a 95% interest in each loan made by participating institutions under the program.

The final terms of the MSLP were significantly revised from those originally proposed, with the goal of making the program more accessible and attractive to borrowers. In its current form — which the Federal Reserve has stated is subject to further revision — the MSLP includes many terms favorable to borrowers, including a favorable interest rate (no greater than LIBOR plus 3%), an interest payment deferral of one year and principal payment deferral of two years, and a borrower-friendly amortization schedule.

The MSLP, however, also includes stringent borrower eligibility requirements, statutory and program-imposed restrictions on borrowers, and onerous reporting requirements. As a result, there is widespread concern that the level of borrower demand will be modest and that the MSLP in its current form will fail to fulfill the expectations of Congress and the Administration. According to numerous reports from banking associations, the Federal Reserve, and the media, to date interest in the program has been limited.

It is of course too early to conclude that the MSLP is a failure: the Main Street SPV has been buying loan participations for less than two weeks. Borrower demand for MSLP loans may well increase if the economic situation stays the same or worsens and a greater number of borrowers find themselves shut off from traditional forms of financing.

If, however, the Federal Reserve’s next monthly report to Congress on outstanding lending facilities, due to be issued on or about August 6, 2020, reflects a significantly lower than expected level of borrower participation in the MSLP, a widespread call for further liberalization of certain MSLP terms may be expected. The possible additional changes that have been suggested by industry groups, banking associations, and other commenters include:

• Further reduction of the minimum loan amount (for the Main Street New Loan Facility and the Main Street Preferred Loan Facility) below $250,000 — perhaps to $100,000. Federal Reserve Chairman Powell has stated that this is under consideration.

• Liberalization of the restrictions on borrower participation based on the program’s limitation of a maximum loan to an amount that, when added to the borrower’s outstanding and undrawn available debt, does not exceed 4x or 6x (depending on the MSLP facility) multiples of EBITDA. These restrictions exclude from participation a large number of creditworthy companies, notably asset-based borrowers. Treasury Secretary Mnuchin, in his June 30 testimony before the House Financial Services Committee, stated that the Treasury and the Federal Reserve are looking into expanding the MSLP to include asset-based loans.

• Lengthening of loan maturity from the current five years to a more typical 10-year term, thereby lessening the possibility of a hard debt repayment for companies that may need more time to reorganize following the pandemic.

Any additional liberalization of MSLP terms and conditions would be subject to both Federal Reserve and Treasury approval.

While the Federal Reserve has indicated a willingness to adjust terms to make the program more attractive or available to more borrowers, the Treasury reportedly has adopted a more conservative approach in order to avoid putting taxpayer money at risk. Furthermore, Secretary Mnuchin has described the MSLP as a backstop that could be successful even without significant use by providing certainty to the market that credit will remain available. As a result, the Treasury has resisted relaxation of loan terms and borrower participation restrictions and may continue to do so even if MSLP loan demand remains weak.