There have been hundreds and hundreds of stories about PPP funds. And while there’s also been quite a bit of press concerning Main Street loans, the program has been slow to get off the ground. One reason is that banks are fatigued from PPP loans and have been reluctant to tackle another project that requires government rules and regulations, and that is not as specific as to underwriting as the PPP loans which was very, very simple. And while more and more banks are jumping on the Main Street lending program’s bandwagon, they are slow to fully embrace the program due to the constant program changes and the program’s requirements preventing a lender from refinancing its current debt with the borrower. This makes the program unattractive to many lenders, since the program forces risk reallocation in the lending market.
The Main Street lending program is being run by the Federal Reserve Bank of Boston which set up a special purpose entity for loan funding, but the actual program is underwritten and serviced by the lending banks. There is no issue with getting a Main Street loan if you received an EILD loan or PPP loan. This is a different loan intended for companies that in 2019 were strong and stable, both the PPP and EILD loans may be refinanced under the program if the loans were not made by the lender who is now making the new Main Street loan.
The purpose of the loan is to help small- and mid-size companies that have been economically impacted by the pandemic, and to maintain and restore business. This helps continued employment, but no requirement exists under the program for any continued level of employment, and the program lacks PPP’s forgiveness features. Eligible borrowers have up to 15,000 employees or up to $5 billion in income. The minimum loan size has been lowered to $250,000 and a "wrap-around loan program" was created for companies that have existing lenders that can go in and increase the amount of the loan.
There are two other types of loans besides what is known as the "expanded loan facility": the new loan facility and the expanded loan facility, both of which are 95 percent guaranteed by the SBA. Funds available under the Main Street new loan facility are calculated at 4-times the previous year’s EBITDA less existing bank debt. And loan funds available under the Main Street priority loan facility are calculated at 6-times 2019 EBITDA, less debt not being refinanced.
The loan rates are LIBOR, which is a commonly used index plus 300 basis points. Interest payments are deferred and recapitalized for one year, and principal payments are deferred for two years. Amortization occurs at a level of one-third in years three and four, with a 70 percent balloon payment due at the end of the fifth year
The loan cannot be used for stock buybacks and dividends, exclusive of tax distributions. There are also limits on compensation to executives, but the executives can be paid, even if they are owners, for reasonable services rendered. EBITDA calculations can be somewhat tricky and I have had several situations where we have had to explain to the bank how the EBITDA calculation works, which is the starting point.
The key is to get to a bank that is going to do these loans. In Minnesota, I am aware of a number of banks that have signed up, so check with the bank you normally use. If not, ask them to help you find a bank, either through a friend of theirs, a participant or an acquaintance. Banks participating in the program are listed on the Federal Reserve Bank of Boston’s website.
Dennis Monroe is a shareholder in Monroe Moxness Berg and a Foodservice News columnist. Partner Tim Ring, who specializes in financing matters, contributed to this article.