How Required Attestations in the CARES Act Affect Participation in the Main Street Lending Program

Updated 5/12/2020 at 3:05pm ET

The Main Street Lending Program and CARES Act Required Certification and Covenants

On April 30, 2020, the Federal Reserve issued new term sheets for three lending facilities, Main Street New Loan Facility (MSNLF), Main Street Priority Loan Facility (MSPLF) and the Main Street Expanded Loan Facility (MSELF) under the CARES Act. All facilities are intended to facilitate lending to small and medium-sized businesses with less than 15,000 employees or less than $5 billion in 2019 revenues. MSELF is intended to upsize loans originated before April 24, 2020; MSNLF and MSPLF are intended for new loans originated on or after April 24, 2020 (see our last blog post here for a detailed breakdown and term sheets of the three MSLP programs).

The MSELF and MSNLF were open for comments until April 16, 2020. As of April 30, 2020, the new term sheets are available that address some of the original lingering questions surrounding the attestations that are now the certifications and covenants section.   The guidance clarifies that non-profit organizations are not currently eligible for these loans.  Below is a breakdown of the CARES Act related certifications and covenants. Please note that these certification are in addition to other requirements specific to the MSLP.

CARES Act Section 4003(c)(3)(A)(ii) and Section 4004

The Required Certifications and Covenants section of the term sheets for MSNLF, MSPLF, and MSELF states, “The Eligible Borrower must follow compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act, except that an S corporation or other tax pass-through entity may make distributions to the extent reasonably required to cover its owners tax obligations in respect to the eligible business’ earnings.”

At a high level, for the period beginning on the date on which the agreement is executed and ending on the date that is one year after the date on which the loan or loan guarantee is no longer outstanding, the business must adhere to these restrictions:

1. Prohibit the equity stock repurchases for publicly traded companies and their parent companies;
2. Prevent payment of dividend or capital distributions of common stock; and
3. Provide limitations on compensation for employees or officers who earned more than $425,000 and $3 million of total compensation in 2019.

Below, SC&H has updated our analysis into these three restrictions, based on the new guidelines set by the Federal Reserve.

Equity Stock Repurchases

Payment of Dividends and Capital Distributions

Compensation Limits

Additionally, there are two notable exceptions to the required attestations, as well as a key provision that determines the duration that a borrower must abide by the attestations.

Notable Exceptions to Certification and Covenants

There are a few expressly provided exceptions; such as:

1. Repurchase of equity securities listed on a national securities exchange is prohibited unless required under a contractual obligation that is in effect as of the date of enactment of this Act (i.e. March 27, 2020)
2. Employee compensation limitations do not apply to compensation determined through an existing collective bargaining agreement entered into prior to March 1, 2020

Certification and Covenants Effective Period

MSLP loan payments are deferred for one year and have a four-year maturity. The CARES Act further stipulates that “until the date 12 months after the date on which the direct loan is no longer outstanding” which means that for up to five years a borrower must agree to abide by these certifications.

We will be monitoring these programs for changes and updates to provide continued up-to-date information and analysis. If you have any questions in the meantime, please reach out to our team here.