Main Street Lending Program: Federal Reserve, Treasury Department Create New Lending Facility, Release Updated Program Terms and FAQ’s
May 21, 2020
This Client Alert relating to the Main Street Lending Program (the “MSLP”) has been updated to incorporate new guidance released by the Federal Reserve on April 30, 2020, copies of which can be found HERE. To see our previous Client Alert relating to the MSLP’s original terms, please see HERE.
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Pursuant to its mandate from Congress to promote maximum employment, stable prices and market stability, the Federal Reserve announced on April 9, 2020, that it is taking measures to provide up to $2.3 trillion to further assist small- and medium-sized businesses during the COVID-19 pandemic.
The actions taken by the Federal Reserve, in part, create the MSLP, which is authorized to purchase, via a newly-created single purpose vehicle (“SPV”), up to $600 billion in MSLP loans from the program’s three separate lending facilities: (i) the Main Street New Loan Facility (the “MSNLF”); (ii) the Main Street Expanded Loan Facility (the “MSELF”); and (iii) the Main Street Priority Loan Facility (the “MSPLF”). The MSNLF is designed for new loan facilities, and the MSELF is designed for the expansion of existing credit facilities, in each case by “Eligible Lenders” to “Eligible Borrowers.”
A key update to the MSLP is the creation of the MSPLF. This lending facility is very similar to the MSNLF except that the MSPLF relates to loan originations occurring after April 24, 2020, and enables more leveraged companies to participate in the MSLP.
The start date for the MSLP has not yet been set, and the terms of the program are subject to change prior to such date.
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An MSPLF loan is a secured or unsecured term loan made by an Eligible Lender(s) to an Eligible Borrower that was originated after April 24, 2020.
The SPV will purchase at par value an eighty-five percent (85%) participation in the MSPLF loan. The SPV and the Eligible Lender will share risk in the MSPLF loan on a pari passu basis. The Eligible Lender must retain its fifteen percent (15%) of the MSPLF loan until it matures or the SPV sells all of its participation, whichever comes first. The sale of a participation in the MSPLF loan to the SPV will be structured as a “true sale” and must be completed expeditiously after the MSPLF loan’s origination.
Eligible MSPLF loans have the following terms:
- Eligible Lenders: S. insured depository institutions (including a bank, savings association, or credit union), a U.S. branch or agency of a foreign bank, U.S. bank holding companies and U.S. savings and loan holding companies, a U.S. intermediate holding company of a foreign banking organization, or a U.S. subsidiary of any of the foregoing.
- Eligible Borrowers: businesses that meet each of the following:
- were established prior to March 13, 2020;
- are not an “Ineligible Business,” which includes, but is not limited to, non-profit organizations, hedge funds, private equity companies, life insurance companies, and financial businesses primarily engaged in the business of lending, such as banks, finance companies, and factors (pawn shops, although engaged in lending, may qualify in some circumstances);
- were organized in the U.S. (or under the laws of the U.S.);
- do not have more than 15,000 employees or had less than $5.0 billion in 2019 annual revenues;
- have significant operations in, and a majority of its employees based in, the U.S.; and
- have not received specified support pursuant to the CARES Act; for the avoidance of doubt, businesses that have received Paycheck Protection Program loans (“PPP Loans”) are permitted to borrow under the MSPLF.
- Loan Term: four (4) years.
- Minimum Loan Amount: $500,000.
- Maximum Loan Amount: The lesser of:
- $25,000,000; and
- an amount that, when added to the borrower’s existing outstanding and undrawn available debt, does not exceed six (6) times the borrower’s 2019 earnings before interest, taxes, depreciation, and amortization (EBITDA).
- Interest Rate: adjustable rate of LIBOR (one (1) or three (3) month) plus 300 basis points.
- Principal and Interest Payments: deferred for one (1) year (unpaid interest will be capitalized) with principal amortization of: (i) fifteen percent (15%) at the end of the second (2nd) year; (ii) fifteen percent (15%) at the end of the third (3rd) year; and (iii) a balloon payment of seventy percent (70%) at the end of the fourth (4th) year.
- Priority: at the time of origination and at all times the MSPLF loan is outstanding, the loan is senior to or pari passu with, in terms of priority and security, the borrower’s other loans or debt instruments, other than mortgage debt.
- Borrower’s Fees:
- an Eligible Lender will pay the SPV an MSPLF fee of 1.0% of the principal amount of the loan participation purchased by the SPV. The Eligible Lender may require the Eligible Borrower to pay all or a portion of this fee.
- an Eligible Borrower will pay an Eligible Lender an origination fee of up to 1.0% of the principal amount of the MSPLF loan.
- Prepayment: no penalty.
- Restrictions: borrowers must follow compensation, stock repurchase and dividend restrictions that apply to direct loan programs under the CARES Act.
- Compatibility with Other Lending Programs:
- borrowers that have been issued PPP Loans may also receive an MSPLF loan.
- borrowers that participate in the MSPLF may not participate in the MSNLF, MSELF, or the Primary Market Corporate Credit Facility.
- Required Borrower Certifications and Covenants: an Eligible Borrower must:
- commit to refrain from repaying the principal balance of, or paying any interest on, any debt until the MSPLF loan is repaid in full, unless the debt or interest payment is mandatory and due. However, the Eligible Borrower may, at the time of origination of the MSPLF loan, refinance existing debt owed by the Eligible Borrower to a lender that is not the Eligible Lender;
- commit that it will not seek to cancel or reduce any of its committed lines of credit with the Eligible Lender or any other lender;
- certify that it has a reasonable basis to believe that, as of the date of origination of the MSPLF loan and after giving effect to such loan, it has the ability to meet its financial obligations for at least the next ninety (90) days and does not expect to file for bankruptcy during that time period;
- commit that it will 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 that is an Eligible Borrower may make distributions to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings; and
- certify that it is eligible to participate in the Facility, including in light of the conflicts of interest prohibition in section 4019(b) of the CARES Act.
- Duration of MSPLF: September 30, 2020, unless extended by the Federal Reserve or the Treasury Department.
- Retaining Employees: Each Eligible Borrower that participates in the MSPLF should make commercially reasonable efforts to maintain its payroll and retain its employees during the time the MSPLF loan is outstanding.
- Loan Classification: If the Eligible Borrower had other loans outstanding with the Eligible Lender as of December 31, 2019, such loans must have had an internal risk rating equivalent to a “pass” in the Federal Financial Institutions Examination Council’s supervisory rating system on that date.
- Assessment of Financial Condition: Eligible Lenders are expected to conduct an assessment of each potential borrower’s financial condition at the time of the potential borrower’s application.
An MSNLF loan is an unsecured term loan made by an Eligible Lender to an Eligible Borrower that was originated on or after April 8, 2020, and has the following terms:
- Eligible Lenders: S. insured depository institutions (including a bank, savings association, or credit union), a U.S. branch or agency of a foreign bank, U.S. bank holding companies and U.S. savings and loan holding companies, a U.S. intermediate holding company of a foreign banking organization, or a U.S. subsidiary of any of the foregoing.
- Eligible Borrowers: businesses that meet each of the following:
- were established prior to March 13, 2020;
- are not an “Ineligible Business,” which includes, but is not limited to, non-profit organizations, hedge funds, private equity companies, life insurance companies, and financial businesses primarily engaged in the business of lending, such as banks, finance companies, and factors (pawn shops, although engaged in lending, may qualify in some circumstances);
- were organized in the U.S. (or under the laws of the U.S.);
- do not have more than 15,000 employees or had less than $5.0 billion in 2019 annual revenues;
- have significant operations in, and a majority of its employees based in, the U.S.; and
- have not received specified support pursuant to the CARES Act; for the avoidance of doubt, businesses that have received PPP Loans are permitted to borrow under the MSNLF.
- Loan Term: four (4) years.
- Minimum Loan Amount: $500,000.
- Maximum Loan Amount: The lesser of:
- $25,000,000; and
- an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed four (4) times the borrower’s 2019 EBITDA.
- Interest Rate: adjustable rate of LIBOR (one (1) or three (3) month) plus 300 basis points.
- Principal and Interest Payments: deferred for one (1) year (unpaid interest will be capitalized). Principal amortization of 33.33% at the end of each of the second (2nd) year, third (3rd) year, and fourth (4th) year.
- Priority: The loans must not be, at the time of origination or at any time during the term of the MSNLF loan, contractually subordinated in terms of priority to any of the Eligible Borrower’s other loans or debt instruments.
- Borrower’s Fees:
- an Eligible Lender will pay the SPV an MSNLF fee of 1.0% of the principal amount of the loan participation purchased by the SPV. The Eligible Lender may require the Eligible Borrower to pay all or a portion of this fee.
- an Eligible Borrower will pay an Eligible Lender an origination fee of up to 1.0% of the principal amount of the MSNLF Loan.
- Prepayment: no penalty.
- Restrictions: borrowers must follow compensation, stock repurchase and dividend restrictions that apply to direct loan programs under the CARES Act.
- Compatibility with Other Lending Programs:
- borrowers that have been issued PPP Loans may also receive an MSNLF loan.
- borrowers that participate in the MSNLF may not participate in the MSELF, the Primary Market Corporate Credit Facility, or the MSPLF.
- Required Borrower Certifications and Covenants: an Eligible Borrower must:
- refrain from repaying the principal balance of, or paying any interest on, any debt until the MSNLF loan is repaid in full, unless the debt or interest payment is mandatory and due;
- commit that it will not seek to cancel or reduce any of its committed lines of credit with the Eligible Lender or any other lender;
- certify that it has a reasonable basis to believe that, as of the date of origination of the MSNLF loan and after giving effect to such loan, it has the ability to meet its financial obligations for at least the next ninety (90) days and does not expect to file for bankruptcy during that time period;
- attest that it will 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 that is an Eligible Borrower may make distributions to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings; and
- certify that the entity is eligible to participate in the MSNLF, including in light of the conflicts of interest prohibition in section 4019(b) of the CARES Act.
- Duration of MSNLF: September 30, 2020, unless extended by the Federal Reserve or the Treasury Department.
- Retaining Employees: Each Eligible Borrower that participates in the MSNLF should make commercially reasonable efforts to maintain its payroll and retain its employees during the time the MSNLF loan is outstanding.
- Loan Classification: If the Eligible Borrower had other loans outstanding with the Eligible Lender as of December 31, 2019, such loans must have had an internal risk rating equivalent to a “pass” in the Federal Financial Institutions Examination Council’s supervisory rating system on that date.
- Assessment of Financial Condition: Eligible Lenders are expected to conduct an assessment of each potential borrower’s financial condition at the time of the potential borrower’s application.
An MSELF loan is a term loan made by an Eligible Lender(s) to an Eligible Borrower that was originated before April 8, 2020, and is designed to enable Eligible Borrowers to expand their existing credit facilities with Eligible Lenders.
The SPV will purchase ninety-five percent (95%) participations in the upsized tranche of MSELF loans from Eligible Lenders, who will retain five percent (5%) of the upsized tranche of each MSELF loan; provided that such loans are upsized on or after April 24, 2020.
The Eligible Lender must be one of the lenders that holds an interest in the underlying MSELF loan at the date of upsizing. The Eligible Lender must retain its five percent (5%) portion of the upsized tranche of the MSELF loan until the upsized tranche of the MSELF loan matures or the SPV sells all of its ninety-five percent (95%) participation, whichever comes first. The Eligible Lender must also retain its interest in the underlying MSELF loan until the underlying MSELF loan matures, the upsized tranche of the MSELF loan matures, or the SPV sells all of its ninety-five percent (95%) participation, whichever comes first. Any collateral securing the MSELF loan (at the time of upsizing or on any subsequent date) must secure the upsized tranche on a pro rata basis. The sale of a participation in the upsized tranche of MSELF loan to the SPV will be structured as a “true sale” and must be completed expeditiously after the MSELF loan’s upsizing.
Eligible MSELF loans have the following terms:
- Eligible Lenders: U.S. insured depository institutions (including a bank, savings association, or credit union), a U.S. branch or agency of a foreign bank, U.S. bank holding companies and U.S. savings and loan holding companies, a U.S. intermediate holding company of a foreign banking organization, or a U.S. subsidiary of any of the foregoing.
- Eligible Borrowers: businesses that meet each of the following:
- were established prior to March 13, 2020;
- are not an “Ineligible Business,” which includes, but is not limited to, non-profit organizations, hedge funds, private equity companies, life insurance companies, and financial businesses primarily engaged in the business of lending, such as banks, finance companies, and factors (pawn shops, although engaged in lending, may qualify in some circumstances);
- were organized in the U.S. (or under the laws of the U.S.);
- do not have more than 15,000 employees or had less than $5.0 billion in 2019 annual revenues;
- have significant operations in, and a majority of its employees based in, the U.S.; and
- have not received specified support pursuant to the CARES Act; for the avoidance of doubt, businesses that have received PPP Loans are permitted to borrow under the MSELF.
- Loan Term: four (4) years.
- Minimum Loan Amount: $10,000,000.
- Maximum Loan Amount: the lesser of:
- $200,000,000;
- thirty-five percent (35%) of the Eligible Borrower’s existing outstanding and undrawn available debt that is pari passu in priority with the MSELF loan and equivalent in secured status (i.e., secured or unsecured); and
- an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed six (6) times the borrower’s 2019 EBITDA.
- Priority: At the time of upsizing and at all times thereafter, the upsized tranche must be senior to or pari passu with, in terms of priority and security, the Eligible Borrower’s other loans or debt instruments, other than mortgage debt.
- Interest Rate: adjustable rate of LIBOR (one (1) or three (3) month) plus 300 basis points.
- Principal and Interest Payments: deferred for one (1) year (unpaid interest will be capitalized) with principal amortization of: (i) fifteen percent (15%) at the end of the second (2nd) year; (ii) fifteen percent (15%) at the end of the third (3rd) year; and (iii) a balloon payment of seventy percent (70%) at the end of the fourth (4th) year.
- Borrower’s Fees:
- an Eligible Borrower will pay an Eligible Lender a fee of up to 0.75% of the principal amount of the upsized tranche of the MSELF loan at the time of upsizing.
- an Eligible Lender will pay the SPV an MSELF fee of 0.75% of the principal amount of the loan participation purchased by the SPV, which the Eligible Lender may require the Eligible Borrower to pay all or a portion of such fee.
- Prepayment: no penalty.
- Compatibility with Other Lending Programs:
- borrowers that have been issued a PPP loan may also receive an MSELF loan.
- borrowers may not participate in the MSNLF, the Primary Market Corporate Credit Facility, or the MSPLF.
- Borrower Attestations: an Eligible Borrower must:
- commit to refrain from repaying the principal balance of, or paying any interest on, any debt until the upsized tranche of the MSELF loan is repaid in full, unless the debt or interest payment is mandatory and due;
- commit that it will not seek to cancel or reduce any of its committed lines of credit with the Eligible Lender or any other lender;
- certify that it has a reasonable basis to believe that, as of the date of origination of the MSELF loan and after giving effect to such loan, it has the ability to meet its financial obligations for at least the next ninety (90) days and does not expect to file for bankruptcy during that time period;
- attest that it will 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 that is an Eligible Borrower may make distributions to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings; and
- certify that it is eligible to participate in the MSELF.
- Duration: September 30, 2020, unless extended by the Federal Reserve or the Treasury Department.
- Retaining Employees: Each Eligible Borrower that participates in the MSELF should make commercially reasonable efforts to maintain its payroll and retain its employees during the time the upsized tranche of the MSELF loan is outstanding.
- Loan Classification: If the Eligible Borrower had other loans outstanding with the Eligible Lender as of December 31, 2019, such loans must have had an internal risk rating equivalent to a “pass” in the Federal Financial Institutions Examination Council’s supervisory rating system on that date.
- Assessment of Financial Condition: Eligible Lenders are expected to conduct an assessment of each potential borrower’s financial condition at the time of the potential borrower’s application.
The Federal Reserve’s FAQ’s attempt to provide answers to certain open questions relating to the MSLP. The below subset of the FAQ’s were pulled directly from the Federal Reserve guidance without alteration and should be helpful for any business that is interested in participating in one of the MSLP facilities. Please review the entirety of the FAQ’s in addition to the following:
- HOW IS “BUSINESS” DEFINED?
Businesses must be legally formed entities that are organized for profit as:
- a partnership;
- a limited liability company;
- a corporation; an association;
- a trust; a cooperative;
- a joint venture with no more than forty-nine percent (49%) percent participation by foreign business entities; or
- a tribal business concern that is either:
- wholly owned by one or more Indian tribal governments, or by a corporation that is wholly owned by one or more Indian tribal governments; or
- owned in part by one or more Indian tribal governments, or by a corporation that is wholly owned by one or more Indian tribal governments, if all other owners are either U.S. citizens or Businesses.
Other forms of organization may be considered for inclusion as an Eligible Borrower under the Program at the discretion of the Federal Reserve.
- HOW SHOULD A BUSINESS COUNT EMPLOYEES FOR PURPOSES OF DETERMINING ELIGIBILITY UNDER THE PROGRAM?
To be an Eligible Borrower, a Business must meet at least one of the following two conditions:
- the Business has 15,000 employees or fewer; or
- the Business has 2019 annual revenues of $5 billion or less.
To determine how many employees a Business has, it should follow the framework set out in the SBA’s regulation at 13 CFR 121.106. As set out in 13 CFR 121.106, the Business should count as employees all full-time, part-time, seasonal, or otherwise employed persons, excluding volunteers and independent contractors. Businesses should count their own employees and those employed by their affiliates.
In order to determine the applicable number of employees, Businesses should use the average of the total number of persons employed by the Eligible Borrower and its affiliates for each pay period over the twelve (12) months prior to the origination or upsizing of the Main Street loan.
- HOW SHOULD A BUSINESS CALCULATE 2019 REVENUES FOR PURPOSES OF DETERMINING ELIGIBILITY UNDER THE PROGRAM?
To be an Eligible Borrower, a Business must meet at least one of the following two conditions:
- the Business has 15,000 employees or fewer; or
- the Business has 2019 annual revenues of $5 billion or less.
To determine its 2019 annual revenues, Businesses must aggregate their revenues with those of their affiliates.
Businesses may use either of the following methods to calculate 2019 annual revenues for purposes of determining eligibility:
- a Business may use its (and its affiliates’) annual “revenue” per its 2019 Generally Accepted Accounting Principles-based (GAAP) audited financial statements; or
- a Business may use its (and its affiliates’) annual receipts for the fiscal year 2019, as reported to the Internal Revenue Service. For purposes of the Program, the term “receipts” has the same meaning used by the SBA in 13 CFR 121.104(a).
If a potential borrower (or its affiliate) does not yet have audited financial statements or annual receipts for 2019, the borrower (or its affiliate) should use its most recent audited financial statements or annual receipts.
- WHICH ENTITIES ARE A BUSINESS’S AFFILIATES FOR PURPOSES OF THE EMPLOYEE AND REVENUE ELIGIBILITY CRITERIA
To determine eligibility, a Business’s employees and 2019 revenues are calculated by aggregating the employees and 2019 revenues of the Business itself with those of the Business’s affiliated entities in accordance with the affiliation test set forth in 13 CFR 121.301(f) (1/1/2019 ed.). This is the same affiliation test as that in the PPP.
- ARE NON-PROFIT ORGANIZATIONS ELIGIBLE TO BORROW UNDER THE PROGRAM?
While non-profit organizations are not currently eligible under the Program, the Federal Reserve acknowledges the unique needs of non-profit organizations, many of which are on the front lines providing critical services and research to fight the pandemic.
EBITDA is the key underwriting metric required for the MSNLF, MSPLF, and MSELF. The Federal Reserve recognizes that the credit risk of non-profit organizations, as a matter of practice, is generally not evaluated on the basis of EBITDA. The Federal Reserve and the Treasury Department will be evaluating the feasibility of adjusting the borrower eligibility criteria and loan eligibility metrics of the Program for such organizations.
- HOW WILL ADJUSTED 2019 EBITDA BE CALCULATED?
For MSNLF and MSPLF, the methodology used by the Eligible Lender to calculate adjusted 2019 EBITDA for an Eligible Borrower must be a methodology it previously used for adjusting EBITDA when extending credit to the Eligible Borrower or to similarly situated borrowers on or before April 24, 2020.
For MSELF Eligible Loans, the methodology used by the Eligible Lender to calculate adjusted 2019 EBITDA for the Eligible Borrower must be the methodology it previously used for adjusting EBITDA when originating or amending the underlying loan on or before April 24, 2020.
- WHAT CONSTITUTES “COMMERCIALLY REASONABLE EFFORTS” TO MAINTAIN PAYROLL AND RETAIN EMPLOYEES?
Eligible Borrowers should make commercially reasonable efforts to retain employees during the term of the MSNLF Loan, MSPLF Loan, or MSELF Upsized Tranche. Specifically, an Eligible Borrower should undertake good-faith efforts to maintain payroll and retain employees, in light of its capacities, the economic environment, its available resources, and the business need for labor. Borrowers that have already laid-off or furloughed workers as a result of the disruptions from COVID-19 are eligible to apply for Main Street loans.
- DO ELIGIBLE BORROWERS QUALIFY AUTOMATICALLY FOR A LOAN UNDER THE PROGRAM?
No. The term sheet contains minimum requirements for the Program. Eligible Lenders are expected to conduct an assessment of each potential borrower’s financial condition at the time of the potential borrower’s application. Eligible Lenders will apply their own underwriting standards in evaluating the financial condition and creditworthiness of a potential borrower.
An Eligible Lender may require additional information and documentation in making this evaluation and will ultimately determine whether an Eligible Borrower is approved for a Program loan in light of these considerations. Businesses that otherwise meet the Eligible Borrower requirements may not be approved for a loan or may not receive the maximum allowable amount.
- CAN AN ELIGIBLE BORROWER RECEIVE MORE THAN ONE MAIN STREET LOAN?
An Eligible Borrower may only participate in one of the Main Street facilities: the MSNLF, the MSPLF, or the MSELF.
However, an Eligible Borrower may receive more than one loan under a single Main Street facility, provided that the sum of MSNLF Loans or MSPLF Loans received by a single borrower cannot exceed $25 million and the sum of MSELF Upsized Tranches received by a single borrower cannot exceed $200 million.
- ARE THE REQUIRED CERTIFICATIONS AND COVENANTS UNDER THE THREE MAIN STREET FACILITIES THE SAME?
While most of the certifications and covenants are the same, there are two variations.
The Eligible Lender certification relating to EBITDA is different in the MSELF than it is in the MSNLF and MSPLF, owing to the fact that the MSELF necessarily includes an existing loan from the Eligible Lender.
In addition, the MSPLF includes a modification to the Eligible Borrower covenant regarding debt repayment to allow an Eligible Borrower to refinance existing debt owed to a lender that is not the Eligible Lender at the time the MSPLF Loan is originated.
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This situation is continuing to evolve. Fox Swibel will continue to monitor developments and stands ready to advise clients in connection with financing available to businesses and non-profits. Additional resources are available on our website HERE. If you have questions about qualifying for or applying for emergency funding, please contact Rick Meller, David Morris or the Fox Swibel attorney with whom you regularly work.
This article contains material of general interest and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. Under applicable rules of professional conduct, this content may be regarded as attorney advertising.