Growth Capital Relief Through the Main Street Loan Program

Posted on: June 23rd, 2020

Growth Capital Relief

A wide swath of companies affected by the crisis are in growth capital rebuilding model. They have done all they can operationally; restructured, refocused and innovated. It is always an asynchronous cycle, with cost saving maneuvers lagging the revenue decline leading to temporary losses for even the best managed companies. In good times, companies can push this loss off to their working capital. Faster collections or slower vendor payments can usually mitigate it.

When every company simultaneously is affected, there is less flexibility to do this, as the entire industry-wide working capital chain is stressed. Getting the company back into the black can happen through severe enough salary cuts, and many companies have reluctantly done this. Eventually, you realize its not possible to cut your way to prosperity and new growth capital is needed to reboot the enterprise. Growth capital comes in a multitude of forms ranging from simple lines of credit to more exotic structured debt and equity. The key is getting the right amount of growth capital, quickly enough to begin the healing process and reliquefy your balance sheet.

The Federal Reserve has launched a new program pursuant to the CARES Act that provides middle market companies a great relief valve for growth capital – the Main Street Loan Program. This program is very different from the PPP program, and requires standard bank underwriting procedures to qualify. The program is $600 billion in size, and involves the Federal Reserve Participating or Purchasing 95% of the loan from the bank. This means your bank originates the loan and holds only 5% of it on its balance sheet, but is the agent for the loan, meaning you interface with them throughout the life of the loan.

The interest rate is Libor plus 3% which equates to 3.37% at today’s market libor rates. The term is 5 years and principal payment is favorable. There is no principal repayment requirement in years 1 and 2. Only 15% of the loan amount is due in years 3 and 4 with the remaining 70% due at the maturity at the end of five years. This 2-year principal repayment holiday is a very attractive feature. The loan only requires 30% paid over the term, providing extra cash flow to support your rebuilding process. The loan program is set up to provide credit based on your pre-covid level of adjusted EBITDA through using a multiple approach.

The multiples are generous with one loan program providing for 4 times 2019 adjusted EBITDA, and another 6 times 2019 adjusted EBITDA. This cash flow-based approach to the loan size is a huge benefit to companies that otherwise would only be able to borrow from their asset base. While Fed guidelines sound highly attractive, it is important to note that banks have discretion as to how to set leverage limits. Ultimately, the bank must approve the loan in compliance with its internal risk guidance. Banks are being sensitive to the fact that most companies are in tough shape financially and are underwriting more to the projected rebound period. This program is a great way for companies to raise growth capital and to refinance existing loans.