UPDATED: Main Street Lending Program: Recent Developments and Clarifications

UPDATE: The below alert (originally published on May 8, 2020) has been updated to reflect the latest terms of the Main Street Lending Program set forth in the revised Term Sheets dated June 8, 2020. For further information regarding those revisions and other recent developments, see our recent client alert dated June 26, 2020.

On April 30, 2020, the Federal Reserve announced a revised and expanded version of the Main Street Lending Program (the “Program”). The original version of the Program, which the Fed announced on April 4, 2020, included term sheets for a Main Street New Loan Facility (the “New Loan Facility”) and a Main Street Expanded Loan Facility (the “Expanded Loan Facility”).^[1] Under its new announcement, the Fed (i) released revised term sheets for both of those facilities and (ii) published a new term sheet for a third facility, the Main Street Priority Loan Facility (the “Priority Loan Facility”). The Fed also issued a Frequently Asked Questions (“FAQs”), which gives a straightforward overview of the Program as a whole and each of the three facilities. This article provides both a high-level summary and a detailed overview of the revised and expanded Program, followed by a discussion of certain key issues.

The Program provides that the Treasury Department will establish a special purpose vehicle (the “SPV”), which will be funded with $75 billion of equity financing from the Treasury Department and $600 billion of loans from the Federal Reserve. Under each of the New Loan Facility and the Priority Loan Facility, the SPV would purchase from eligible lenders 95 percent participations in secured or unsecured term loans of up to $35 million (under the New Loan Facility) or $50 million (under the Priority Loan Facility) originated on or after April 8, 2020 and that satisfy other eligibility criteria outlined below. (The eligible lenders would retain the other 5 percent.)

Under the Expanded Loan Facility, the SPV would purchase from eligible lenders 95 percent participations in upsized tranches of secured or unsecured term loans or revolving credit facilities (in an amount not to exceed $300 million per borrower) originated before April 24, 2020 and that have a remaining maturity of at least 18 months and that satisfy other eligibility criteria outlined below. (The eligible lenders would retain the other 5 percent.)

On June 15, 2020, the Federal Reserve announced a proposal to expand the Program to include qualifying nonprofit organizations as eligible borrowers, and provided proposed Term Sheets for a Nonprofit Organization New Loan Facility and a Nonprofit Organization Expanded Loan Facility. The proposed Term Sheets for those two new proposed facilities are discussed in our recent client alert dated June 26, 2020.

High-level summary of the Program

The New, Priority, and Expanded Loan Facilities have many of the same features, including the same maturity, interest rate, deferral of principal payments for two years and interest payments for one year, and ability of the borrower to prepay without penalty. As described below, however, certain other features differ, including how the loan types interact with the Eligible Borrower’s existing outstanding debt.

New Loan Facility. Under the New Loan Facility, Eligible Lenders extend new loans to Eligible Borrowers ranging in size from $250,000 to $35 million. The maximum loan size may not, when added to the Eligible Borrower’s existing outstanding and undrawn available debt, exceed four times the Eligible Borrower’s adjusted 2019 earnings before interest, taxes, depreciation, and amortization (“EBITDA”). The loans must not be, at the time of origination or at any time during the term of the Eligible Loan, contractually subordinated in terms of priority to any of the Eligible Borrower’s other loans or debt instruments.

Sales by Eligible Lenders of 95 percent participations in New Loan Facility loans would be structured as “true sales” and completed expeditiously after the origination. The Eligible Lender would retain 5 percent of the New Loan Facility loan until it matures or the SPV sells all of its participation (whichever occurs first). The SPV and the Eligible Lender would share in any losses on the New Loan Facility loan on a pari passu basis.

Priority Loan Facility. Under the Priority Loan Facility, Eligible Lenders extend new loans to Eligible Borrowers ranging in size from $250,000 to $50 million. The maximum size of a loan made in connection with the Priority Loan Facility may not, when added to the Eligible Borrower’s existing outstanding and undrawn available debt, exceed six times the Eligible Borrower’s adjusted 2019 EBITDA. At the time of origination and at all times thereafter, the Eligible Loan 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. Eligible Borrowers may, at the time of origination of the loan, refinance existing debt owed by the Eligible Borrower to a lender that is not the Eligible Lender.

Sales by Eligible Lenders of 95 percent participations in Priority Loan Facility loans would be structured as “true sales” and completed expeditiously after the origination. The Eligible Lender would retain 5 percent of the Priority Loan Facility loan until it matures or the SPV sells all of its participation (whichever occurs first). The SPV and the Eligible Lender would share in any losses on the Priority Loan Facility loan on a pari passu basis.

Expanded Loan Facility. Under the Expanded Loan Facility, Eligible Lenders “upsize” an Eligible Borrower’s existing term loan or revolving credit facility. The upsized tranche is a five-year term loan ranging in size from $10 million to $300 million. The maximum loan size made in connection with the Expanded Loan Facility may not exceed an amount that, when added to the Eligible Borrower’s existing outstanding and undrawn available debt, six times the Eligible Borrower’s adjusted 2019 EBITDA. The upsized tranche must at all times 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.

Sales by Eligible Lenders of 95 percent participations in Expanded Loan Facility upsized tranches would be structured as “true sales” and completed expeditiously after the upsizing. The Eligible Lender would retain 5 percent of the Expanded Loan Facility upsized tranche until it matures or the SPV sells all of its participation (whichever occurs first). The Eligible Lender would also retain its interest in the underlying loan until that loan matures, the Expanded Loan Facility upsized tranche matures, or the SPV sells all of its participation (whichever occurs first). The SPV and the Eligible Lender would share in any losses on the Expanded Loan Facility upsized tranche on a pari passu basis, and any collateral that secures the underlying loan would secure the upsized tranche on a pro rata basis.

To be eligible, existing term loans or revolving credit facilities must have been originated on or before April 24, 2020 and have a remaining maturity of at least 18 months. An Eligible Lender may extend the maturity of an existing loan or revolving credit facility at the time of upsizing in order for the underlying instrument to satisfy the 18-month remaining maturity requirement.

Under each of the New Loan Facility, the Priority Loan Facility, and the Expanded Loan Facility, the Eligible Borrower must have been in sound financial condition prior to the onset of the COVID-19 pandemic. Furthermore, the existing loan or revolving credit facility must have had a risk rating, based on the Eligible Lender’s internal rating system, equivalent to a “pass” in the FFIEC’s supervisory rating system as of December 31, 2019.

The SPV will cease purchasing loan participations on September 30, 2020, unless the Program is extended. The Federal Reserve Bank of Boston will continue to operate the SPV until the SPV’s assets mature or are sold.

Detailed overview of the Program

New Loan Facility

The terms of the New Loan Facility are as follows.

• Eligible lenders. Eligible lenders are U.S. federally insured depository institutions, U.S. branches or agencies of a foreign bank, U.S. bank holding companies, a U.S. savings and loan holding companies, U.S. intermediate holding companies of a foreign banking organization, and U.S. subsidiaries of any of the foregoing.
• Eligible borrowers. Eligible borrowers are U.S. businesses with up to 15,000 employees or up to $5 billion in 2019 annual revenues, subject to certain additional conditions.^[2] Eligible borrowers that participate in the New Loan Facility may not also participate in the Expanded Loan Facility or the Priority Loan Facility (or the Primary Market Corporate Credit Facility), but may have participated in the Paycheck Protection Program (the “PPP”).
• Eligible loans. An eligible loan has the following features: (1) five-year maturity; (2) principal payments deferred for two years and interest deferred for one year (unpaid interest will be capitalized); (3) adjustable rate of LIBOR (1 or 3 month) plus 300 basis points; (4) principal amortization of 15 percent at the end of the third year, 15 percent at the end of the fourth year, and a balloon payment of 70 percent at the end of the fifth year; (5) minimum loan size of $250,000; (6) maximum loan size that is the lesser of (i) $35 million or (ii) an amount that, when added to the Eligible Borrower’s existing outstanding and undrawn available debt, does not exceed four times the Eligible Borrower’s adjusted 2019 EBITDA;^[3] (7) is not, at the time of origination or at any time during the term of the Eligible Loan, contractually subordinated in terms of priority to any of the Eligible Borrower’s other loans or debt instruments; and (8) prepayment permitted without penalty.
• 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. In contrast to the PPP, Eligible Lenders are expected to conduct an assessment of each potential borrower’s financial condition at the time of the potential borrower’s application.
• Loan participations. The SVP will purchase at par value a 95 percent participation interest in the Eligible Loan. The SPV and the eligible lender will share risk on a pari passu basis. The Eligible Lender must retain its 5 percent of the Eligible Loan until it matures or the SPV sells all of its participation (whichever occurs first). The sale of a participation in the Eligible Loan to the SPV will be structured as a “true sale” and must be completed expeditiously after the Eligible Loan’s origination.

• Required lender certifications and covenants. Eligible Lenders are required to make the following certifications and covenants at the time of the origination of the Eligible loan:

  • The Eligible Lender must commit that it will not request that the Eligible Borrower repay debt extended by the Eligible Lender to the Eligible Borrower, or pay interest on such outstanding obligations, until the Eligible Loan is repaid in full, unless the debt or interest payment is mandatory and due, or in the case of default and acceleration.
  • The Eligible Lender must commit that it will not cancel or reduce any existing committed lines of credit to the Eligible Borrower, except in an event of default.
  • The Eligible Lender must certify that the methodology used for calculating the Eligible Borrower’s adjusted 2019 EBITDA for the leverage requirement is the methodology it has previously used for adjusting EBITDA when extending credit to the Eligible Borrower or similarly situated borrowers on or before April 24, 2020.
  • The Eligible Lender must certify that it is eligible to participate in the New Loan Facility, including in light of the conflicts of interest prohibition in section 4019(b) of the CARES Act.

• Required borrower certifications and covenants. Eligible Borrowers are required to make the following certifications and covenants at the time of origination of the Eligible Loan:

  • The Eligible Borrower must commit to refrain from repaying the principal balance of, or paying any interest on, any debt until the Eligible Loan is repaid in full, unless the debt or interest payment is mandatory and due.
  • The Eligible Borrower must 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.
  • The Eligible Borrower must certify that it has a reasonable basis to believe that, as of the date of origination of the Eligible Loan and after giving effect to such loan, it has the ability to meet its financial obligations for at least the next 90 days and does not expect to file for bankruptcy during that time period.
  • The Eligible Borrower must 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.
  • The Eligible Borrower must certify that it is eligible to participate in the New Loan Facility, including in light of the conflicts of interest prohibition in section 4019(b) of the CARES Act.
• Retention of employees. Each Eligible Borrower that participates in the New Loan Facility should make commercially reasonable efforts to maintain its payroll and retain its employees during the time the Eligible Loan is outstanding. As discussed below, the FAQs state that Eligible Borrowers should make commercially reasonable efforts to retain employees during the term of the New Loan Facility loan, Priority Loan Facility loan, or Expanded Loan Facility upsized tranche. The FAQs also specify that borrowers that have already laid-off or furloughed workers as a result of the disruptions from COVID-19 remain eligible to apply for loans under the Program.
• Transaction fee. An Eligible Lender will pay the SPV a transaction fee of 100 basis points of the principal amount of the Eligible Loan at the time of origination. The Eligible Lender may require the Eligible Borrower to pay this fee.
• Loan origination and servicing fees. An Eligible Borrower will pay an Eligible Lender an origination fee of up to 100 basis points of the principal amount of the Eligible Loan at the time of origination. The SPV will pay an Eligible Lender 25 basis points of the principal amount of its participation in the Eligible Loan per annum for loan servicing.
• Facility termination. The SPV will cease purchasing participations in Eligible Loans on September 30, 2020, unless the Board and the Department of the Treasury extend the Facility. The Reserve Bank will continue to fund the SPV after such date until the SPV’s underlying assets mature or are sold.

Priority Loan Facility

The terms under the Priority Loan Facility are closely similar to those under the New Loan Facility.

• Eligible lenders. Same as New Loan Facility.
• Eligible borrowers. Same as New Loan Facility.

• Eligible Loans. Same as New Loan Facility, except that:

  • Maximum loan size that is the lesser of (i) $50 million or (ii) an amount that, when added to the Eligible Borrower’s existing outstanding and undrawn available debt, does not exceed six times the Eligible Borrower’s adjusted 2019 EBITDA; and
  • (ii) Eligible Loans may be secured or unsecured (depending on borrower’s capital structure), although at the time of origination and at all times the Eligible Loan is outstanding, the Eligible Loan 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.
• Loan classification. Same as New Loan Facility.
• Assessment of financial condition. Same as New Loan Facility.
• Loan participations. Same as New Loan Facility.
• Required lender certifications and covenants. Same as New Loan Facility.
• Required borrower certifications and covenants. Same as New Loan Facility, except as follows. As with the New Loan Facility, the Eligible Borrower must commit to refrain from repaying the principal balance of, or paying any interest on, any debt until the Eligible Loan is repaid in full, unless the debt or interest payment is mandatory and due. Additionally, however, under the Priority Loan Facility, the Eligible Borrower may, at the time of origination of the Eligible Loan, refinance existing debt owed by the Eligible Borrower to a lender that is not the Eligible Lender.
• Retaining employees. Same as New Loan Facility.
• Transaction fee. Same as New Loan Facility.
• Loan origination and servicing fees. Same as New Loan Facility.
• Facility termination. Same as New Loan Facility.

Expanded Loan Facility

The terms under the Expanded Loan Facility are generally similar to those under the New Loan Facility (except that such terms generally apply to the upsized tranche of the Eligible Loan, rather than to the Eligible Loan itself).

• Eligible lenders. Same as New Loan Facility.
• Eligible borrowers. Same as New Loan Facility.

• Eligible Loans. Same as New Loan Facility, except as follows:

  • To be eligible, existing term loans or revolving credit facilities must have been originated on or before April 24, 2020 and have a remaining maturity of at least 18 months.
  • Minimum loan size is $10 million.
  • Maximum loan size that is the lesser of (i) $300 million or (ii) an amount that, when added to the Eligible Borrower’s existing outstanding and undrawn available debt, does not exceed six times the Eligible Borrower’s adjusted 2019 EBITDA.^[4]
  • At the time of upsizing and at all times the upsized tranche is outstanding, the upsized tranche is 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.
• Loan classification. The Eligible Loan must have had an internal risk rating equivalent to a “pass” in the Federal Financial Institutions Examination Council’s supervisory rating system as of December 31, 2019.
• Assessment of financial condition. Same as New Loan Facility.
• Loan participations. The Eligible Lender must also retain its interest in the underlying Eligible Loan until the underlying Eligible Loan matures, the upsized tranche of the Eligible Loan matures, or the SPV sells all of its 95 percent participation (whichever occurs first). Any collateral securing the Eligible Loan (at the time of upsizing or on any subsequent date) must secure the upsized tranche on a pro rata basis.
• Required lender certifications and covenants. Generally same as New Loan Facility.
• Required borrower certifications and covenants. Generally same as New Loan Facility.
• Retaining employees. Generally same as New Loan Facility.
• Transaction fee. An Eligible Lender will pay the SPV a transaction fee of 75 basis points of the principal amount of the upsized tranche of the Eligible Loan at the time of upsizing. The Eligible Lender may require the Eligible Borrower to pay this fee.
• Loan upsizing and servicing fees. An Eligible Borrower will pay an Eligible Lender an origination fee of up to 75 basis points of the principal amount of the upsized tranche of the Eligible Loan at the time of upsizing. The SPV will pay an Eligible Lender 25 basis points of the principal amount of its participation in the upsized tranche of the Eligible Loan per annum for loan servicing.
• Facility termination. Same as New Loan Facility.

Key issues under the Program

The Federal Reserve’s April 30, 2020 FAQs provide important clarifications on a number of the terms described above. Certain of these key clarifications are discussed below.

Definition of “Business”. As indicated above, Eligible Borrowers are limited to “U.S. businesses” (“Businesses”). A qualifying Business 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 49 percent participation by foreign business entities; or a tribal business concern.^[5] The FAQs note, however, that other forms of organization may be considered for inclusion as an Eligible Borrower under the Program at the discretion of the Federal Reserve.

How “employees” should be counted for purposes of determining eligibility. To determine how many employees a Business has for purposes of the 15,000 employee threshold, a Business should, pursuant to 13 C.F.R. 121.106, count as employees all full-time, part-time, seasonal, or otherwise employed persons, excluding volunteers and independent contractors. The average of the total number of persons employed by the Eligible Borrower and its affiliates for each pay period over the 12 months prior to the origination or upsizing of the loan, as applicable, should be used.

How 2019 revenues are calculated for purposes of determining eligibility. To determine its 2019 annual revenues for purposes of the $5 billion 2019 annual revenue threshold, a Business should aggregate its revenues with those of its affiliates. Either of the following methods may be used to calculate 2019 annual revenues: (i) annual “revenue” under the Business’s 2019 GAAP audited financial statements; or (ii) annual receipts for the fiscal year 2019, as reported to the Internal Revenue Service.^[6] If a Business or its affiliate does not yet have audited financial statements or annual receipts for 2019, then it should use its most recent audited financial statements or annual receipts.

Which entities count as “affiliates” for purposes of determining eligibility. Affiliation is determined in the same fashion as under the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”); namely, in accordance with the affiliation test set forth in 13 CFR 121.301(f) (1/1/2019 ed.) and related SBA guidance in connection with the PPP.

Eligibility of non-profit organizations under the Program. As indicated above, non-profit organizations are not currently eligible under the Program, and EBITDA is the key underwriting metric required for the three facilities. However, the FAQs state that the Federal Reserve and the Treasury Department will evaluate the feasibility of adjusting the borrower eligibility criteria and loan eligibility metrics of the Program for non-profits.

Alternative underwriting metric be developed for asset-based borrowers. The FAQs state that the Federal Reserve and the Treasury Department will evaluate the feasibility of adjusting the loan eligibility metrics of the Program asset-based borrowers, given that the credit risk of such borrowers, as a matter of practice, is generally not evaluated on the basis of EBITDA.

Underwriting standards. Eligible Lenders may apply their own underwriting standards in evaluating the financial condition and creditworthiness of a potential borrower.

Calculation of “existing outstanding and undrawn available debt”. “Existing outstanding and undrawn available debt” includes all amounts borrowed under any loan facility, including unsecured or secured loans from any bank, non-bank financial institution, or private lender, as well as any publicly issued bonds or private placement facilities. It also includes all unused commitments under any loan facility, excluding (i) any undrawn commitment that serves as a backup line for commercial paper issuance, (ii) any undrawn commitment that is used to finance receivables (including seasonal financing of inventory), (iii) any undrawn commitment that cannot be drawn without additional collateral, and (iv) any undrawn commitment that is no longer available due to change in circumstance. Existing outstanding and undrawn available debt should be calculated as of the date of the loan application.

Payment of interest. Under all three facilities, no payments of principal will be required for the first two years of the loan, and no payments of interest will be required during the first 12 months of the loan. Unpaid interest would be capitalized.

What constitutes “commercially reasonable efforts” to maintain payroll and retain employees. The FAQs state that 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. (But Eligible Borrowers that have already laid off or furloughed workers as a result of the disruptions from COVID-19 may nevertheless be eligible to apply for loans under the Program.)

Participating in more than one Program facility. Although an Eligible Borrower may participate in only one of the facilities, an Eligible Borrower may receive more than one loan under a single facility, provided that the sum of such loans does not breach the relevant loan size limit.

Restrictions placed on an Eligible Lender’s ability to cancel or reduce any existing committed lines of credit outstanding. An Eligible Lender must commit to not cancelling or reducing any existing committed lines of credit outstanding to the Eligible Borrower, except in an event of default. This requirement, however, does not prohibit the reduction or termination of uncommitted lines of credit, the expiration of existing lines of credit in accordance with their terms, or the reduction of availability under existing lines of credit in accordance with their terms due to changes in borrowing bases or reserves in asset-based or similar structures.

Eligible Lender’s role in verifying certifications and covenants. An Eligible Lender must collect required certifications and covenants from an Eligible Borrower upon origination or upsizing. Eligible Lenders may rely on such certifications and covenants, as well as any subsequent self-reporting by an Eligible Borrower. The Eligible Lender is not expected to independently verify the Eligible Borrower’s certifications or actively monitor ongoing compliance with such covenants. If an Eligible Lender becomes aware of a material misstatement or breached covenant during the term of a loan or upsized tranche under the Program, the Eligible Lender should notify the Federal Reserve Bank of Boston.

Please reach out to your Orrick contact for any questions or if you require assistance regarding the Main Street Lending Program.