The program, first announced March 27 as part of the $2.3 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES) Act, is aimed at supplying relatively low-interest loans to companies with as many as 10,000 employees. The program is expected to support up to $600 billion in new loans.
Despite the favorable terms, these are still loans, so they require thoughtful consideration before you apply. Here are four things you need to know:
1. They aren't forgivable.
Unlike loans supported under the $349 billion PPP, Main Street loans need to be repaid in full. The loans come with four-year terms and variable interest rates that currently range between 2.5 percent and 4 percent. Main Street loan borrowers can defer their principal and interest payments for one year.
2. The loans are big--perhaps too big.
The amount of debt businesses are allowed to take on under the Main Street Lending Program is far greater than usual, says Chuck Morton, partner and co-chair of the corporate group at Venable, a Washington, D.C.-based law firm. Banks typically prefer to lend around two and a half or three times a borrower's earnings before interest, taxes, depreciation and amortization (EBITDA).
Under the Main Street program, the maximum amount of the loans is four times EBITDA or six times EBITDA, depending on the elected facility. (The program supports two--one for new loans and one for borrowers who have an existing loan through a given lender. It's unclear whether a borrower who has an existing loan is required to tap the latter of the two facilities.) So if a company had $2 million EBITDA in 2019 and no debt, a lender would normally approve a $5 million or $6 million loan. A Main Street loan could come in at $8 million or even $12 million.
Historically banks have been hesitant to let businesses become that leveraged, out of concern they wouldn't get their money back, Morton says. So just because you can take out such a large loan, doesn't mean you should. Think hard about what your business will be able to manage. "The decision for any business to take on the amount of debt that is possible under the Main Street program, which you have to pay back in four years at interest rates that are not much better than what they could get commercially, is a very different calculus," Morton says.
3. Some lenders might not like them.
Even if borrowers have existing loans, the way the guidance is written suggests they will be required to pay off their Main Street loans first, notes Ami Kassar, the founder and CEO of MultiFunding, a small-business loan adviser based in Ambler, Pennsylvania. While you are specifically prohibited from using the loan proceeds to repay or refinance existing debt, you are also required to first pay off your Main Street loan before repaying other loan commitments that have an equal or lesser priority. There's an exception for mandatory principal payments.
It's unclear what level of priority these Main Street loans will be given relative to a borrower's existing loans and the ambiguity in the terms sheets doesn't help this question, notes Morton.
4. Compensation and distributions will be limited.
According to the term sheets, Main Street loan borrowers have to follow all of the restrictions under the PPP with respect to compensation, stock repurchases, and capital distributions for the term of the loan, plus one year. That means borrowers may not make dividend outlays or other capital distributions during that time. That shouldn't affect the payments to owners of pass-through entities who may be able to augment their salary with dividend payouts, says Morton, who notes that the dividend clause pertains to common stock holders and, likely, to holders of other equity viewed as equivalent to common stock.
There are, however, compensation restrictions to note: Main Street loan holders are required to freeze salaries for employees that make between $425,000 and $3 million in total annual compensation. According to Morton's reading of the CARE Act, they cannot receive, in any 12-month period, total compensation greater than their 2019 total compensation. For employees who earn more than $3 million, their compensation is capped at $3 million plus 50 percent of their 2019 compensation over $3 million. So if an employee earned $7 million last year, under the loan terms, that employee may not receive more than $5 million in total compensation.