Federal Reserve Provided Additional Details Regarding $600 Billion Main Street Lending Program
On April 30, 2020, the Board of Governors of the Federal Reserve System (the “FRB”) announced additional details regarding its previously announced Main Street Lending Program (the “MSLP”). In response to the public input, the FRB is proposing the following changes:
- created a third loan option (Main Street Priority Loans), with increased risk sharing by lenders (15% versus 5%) for borrowers with greater leverage (6x adjusted 2019 EBITDA versus 4x adjusted 2019 EBITDA);
- lowering the minimum loan size for Main Street New Loans and Main Street Priority Loans to $500,000 from $1 million; and
- expanding the pool of eligible businesses by increasing the maximum number of employees to 15,000 (from 10,000) and 2019 revenues to $5.0 billion (from $2.5 billion).
Using funds appropriated to the U.S. Department of the Treasury (“Treasury”) from the Exchange Stabilization Fund under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), Treasury will make a $75 billion equity investment in a special purpose vehicle (the “Main Street SPV”). The FRB (and the Federal Reserve Bank of Boston in particular) will operate the Main Street SPV, which will purchase up to $600 billion of participations in loans under the MSLP as part of three facilities: the Main Street New Loan Facility (the “MSNLF”), the Main Street Priority Loan Facility (the “MSPLF”), and the Main Street Expanded Loan Facility (the “MSELF”). The FRB and Treasury may adjust the size of the MSLP in the future.
The eligibility to borrow is the same across each of the three facilities under the MSLP. A borrower must be a “Business” which is defined, for purposes of the MSLP, as an entity that is 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% participation by foreign business entities; or certain tribal business concerns.
In order to be an “Eligible Borrower”, a Business must satisfy the following criteria:
- the Business must have been established prior to March 13, 2020
- the Business must not be an “Ineligible Business”
- the Business (aggregated with its affiliated entities ) must meet at least one of the following two conditions: (a) the Business has 15,000 employees or fewer , or (b) the Business had 2019 annual revenues of $5 billion or less
- the Business was created or organized in the United States or under the laws of the United States with significant operations in, and a majority of its employees based in, the United States
- the Business may only participate in one of the MSLP facilities and must not also participate in the Primary Market Corporate Credit Facility (“PMCCF”)
- a Business is not eligible if it has received support pursuant to Section 4003(b)(1)-(3) of the CARES Act ($46 billion for direct Treasury support for passenger air carriers (and certain specified related businesses), cargo air carriers, and businesses critical to maintaining national security)
- the Business must be able to make all of the certifications and covenants required under the MSLP
Additionally, an Eligible Borrower must have been in sound financial condition prior to the outset of COVID-19 pandemic.
Accordingly, the following types of business are not currently eligible to participate in the MSLP at this time:
- non-profit organizations
- asset-based borrowers
For each of the foregoing, the FRB and Treasury will be evaluating the feasibility of adjusting the borrower eligibility criteria and underwriting metrics of the MSLP for such organizations. Other forms of organization may be considered for inclusion in the MSLP at the discretion of FRB.
Businesses deemed to be ineligible to participate under PPP (e.g., banks, life insurance companies, hedge funds, and private equity firms) are not able to receive an eligible loan under the MSLP. Also, portfolio companies of private equity firms should carefully review the 2019 Affiliation Rules to determine whether aggregation is necessary in determining if they exceed either the 15,000 employee or $5 billion in revenue condition.
Currently, “Eligible Lenders” are restricted to U.S. federally-insured depository institutions (including banks, savings associations, and credit unions), U.S. branches or agencies of foreign banks, U.S. bank holding companies, U.S. savings and loan holding companies, U.S. intermediate holding companies of foreign banking organizations, or any U.S. subsidiary of any of the foregoing. At this time, nonbank financial institutions are not considered Eligible Lenders for purposes of the Program. However, the FRB is considering options to expand the list of Eligible Lenders in the future.
Solely with respect to making a MSELF loan, if the loan underlying a MSELF upsized tranche is part of a multi-lender facility, the Eligible Lender must be one of the lenders that holds an interest in the underlying loan at the date of upsizing. Only the Eligible Lender for the MSELF upsized tranche is required to meet the Eligible Lender criteria. Other members of the multi-lender facility are not required to be Eligible Lenders.
Eligible Lenders are expected to conduct an assessment of each potential borrower’s financial condition at the time of the potential borrower’s application, applying 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 MSLP 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.
[a] To be eligible for “upsizing” under the MSELF, the existing term loan or revolving credit facility must have been originated on or before April 24, 2020, and must have a remaining maturity of at least 18 months. The 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.
[b] “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, (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.
[c] 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.
[d] The Eligible Lender must retain its portion of the eligible loan until such loan or upsized tranche matures or the Main Street SPV sells all of its participation, whichever comes first.
[e] LIBOR can be the adjustable rate for 1 month or 3 month. Consistent with the recommendations of the Alternative Reference Rates Committee, Eligible Lenders and Eligible Borrowers should include fallback contract language to be used should LIBOR become unavailable during the term of the loan.
[f] This means that a MSNLF Loan may not be junior in priority in bankruptcy to the Eligible Borrower’s other unsecured loans or debt instruments. This provision does not prevent: (i) the issuance of a MSNLF Loan that is a secured loan (including in a second lien or other capacity) to an Eligible Borrower, whether or not the Eligible Borrower has an outstanding secured loan of any lien position or maturity; (ii) the issuance of a MSNLF Loan that is an unsecured loan to an Eligible Borrower, regardless of the term or secured or unsecured status of the Eligible Borrower’s existing indebtedness; or (iii) the Eligible Borrower from taking on new secured or unsecured debt after receiving a MSNLF Loan, provided the new debt would not have higher contractual priority in bankruptcy than the MSNLF Loan.
[g] These restrictions would not prohibit an Eligible Borrower from undertaking any of the following actions during the term the MSLP loan: (i) repaying a line of credit (including a credit card) in accordance with the Eligible Borrower’s normal course of business usage for such line of credit; (ii) taking on and paying additional debt obligations required in the normal course of business and on standard terms, including inventory and equipment financing, provided that such debt is secured by newly acquired property (e.g., inventory or equipment), and, apart from such security, is of equal or lower priority than the applicable MSLP loan; or (iii) refinancing maturing debt. Additionally, the Eligible Lender would not be prevented from accepting regularly scheduled, periodic repayments on a line of credit from an Eligible Borrower in accordance with the Eligible Borrower’s normal course of business usage for such line of credit.
[h] For MSNLF and MSPLF, Eligible Borrower is not required to have an existing loan with the Eligible Lender.
[i] Fee paid for transaction by Eligible Lender to Main Street SPV, which Eligible Lender may require the Eligible Borrower to pay.
[j] Fee paid for loan origination by Eligible Borrower to Eligible Lender. Eligible Lender has discretion over whether and when to charge Eligible Borrower this fee.
[k] Annual fee for loan servicing by Main Street SPV to Eligible Lender. The FRB will provide further information regarding credit administration and loan servicing on its website.
Additional Terms and Conditions for Eligible Borrowers
Retaining Employees. According to the FRB, Eligible Borrowers should make commercially reasonable efforts to retain employees during the term of the MSNLF loan, the MSPLF loan, or the 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 loans under the MSLP.
Restrictions on Compensation, Dividends, Distributions and Buybacks. The compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act apply under each of the MSELF, MSNLF and MSPLF, except that, in each case, restrictions on dividends and other capital distributions will not apply to distributions made by an S corporation or other tax pass-through entity to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings.
Section 4003(c)(3)(A)(ii) of the CARES Act prohibits Eligible Borrowers, during the term of the loan and for a period of twelve (12) months after the loan is no longer outstanding, from:
- repurchasing any equity security that is listed on a national securities exchange of the eligible business or any parent company of the eligible business, except to the extent required under a contractual obligation that was in effect as of March 27, 2020,
- paying dividends or making other capital distributions with respect to the common stock of the eligible business,
- any officer or employee of the eligible business whose total compensation exceeded $425,000 in calendar year 2019 (other than an employee whose compensation is determined through an existing collective bargaining agreement entered into prior to March 1, 2020) from:
- receiving from the eligible business total compensation which exceeds, during any 12 consecutive months of such period, the total compensation received by the officer or employee from the eligible business in calendar year 2019, or
- will receiving from the eligible business severance pay or other benefits upon termination of employment with the eligible business which exceeds twice the maximum total compensation received by the officer or employee from the eligible business in calendar year 2019, and
- any officer or employee of the eligible business whose total compensation in calendar year 2019 exceeded $3 million from receiving during any 12 consecutive months of such period total compensation in excess of the sum of (a) $3 million and (b) 50% of the amount equal to (x) the total compensation received by the officer or employee from the eligible business in calendar year 2019 less (y) $3 million.
For purposes of Section 4004 of the CARES Act, “total compensation” includes salary, bonuses, awards of stock, and other financial benefits provided by an eligible business to an officer or employee of the eligible business. It is unclear if these restrictions would apply solely to the Eligible Borrower or to its consolidated subsidiaries and other affiliated entities as well.
Other Certifications and Covenants of an Eligible Borrower. 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; and
- it is eligible to participate in the applicable MSLP facility, including in light of the conflicts of interest prohibition in Section 4019(b) of the CARES Act.
Lender Certifications, Covenants, Regulatory Treatment and Other Information
Maintain Existing LOCs to Eligible Borrower. An Eligible Lender must commit that it will not cancel or reduce any existing committed lines of credit outstanding to the Eligible Borrower, except in an event of default. This requirement 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 Information Verification. An Eligible Lender is required to collect the required certifications and covenants from each Eligible Borrower at the time of origination or upsizing. Eligible Lenders may rely on an Eligible Borrower’s certifications and covenants, as well as any subsequent self-reporting by the Eligible Borrower. The Eligible Lender is not expected to independently verify the Eligible Borrower’s certifications or actively monitor ongoing compliance with covenants required for Eligible Borrowers under the MSLP term sheets. If an Eligible Lender becomes aware that an Eligible Borrower made a material misstatement or otherwise breached a covenant during the term of a MSLP loan, the Eligible Lender should notify the FRB Boston.
Other Eligible Lender Certifications. The Eligible Lender will certify that:
- the methodology used for calculating the Eligible Borrower’s adjusted 2019 EBITDA for the leverage requirement in calculating the maximum loan size (see “Term Sheet – Maximum Loan” above) is the methodology it has previously used (a) in the case of MSNLF loans or MSPLF loans, for adjusted EBITDA when extending credit to the Eligible Borrower or similarly situated borrowers on or before April 24, 2020, or (b) in the case of MSELF upsized tranches, for adjusted EBITDA when originating or amending the eligible loan on or before April 24, 2020; and
- it is eligible to participate in the applicable MSLP facility, including in light of the conflicts of interest prohibition in Section 4019(b) of the CARES Act.
Regulatory Treatment. The interest in the portion of a MSLP loan that is retained by an Eligible Lender should be assigned the risk weight applicable to the counterparty for the loan (generally a 100% risk weight for a corporate exposure under the standardized approach). Secured MSLP loans are eligible for the credit risk mitigation treatment in the standardized approach provided that any collateral securing the loan is eligible financial collateral. Eligible Lenders are not permitted to recognize collateral attributable to the Main Street SPV’s interest for purposes of the credit risk mitigation treatment under the capital rule. With respect to the MSELF, the underlying loan or line of credit would be subject to the capital treatment that applied prior to the sale of the participation to the Main Street SPV.
The treatment described above applies only to Eligible Lenders that are subject to the federal banking agencies’ capital rule. Credit unions that participate in the MSLP are subject to any capital requirements implemented by the National Credit Union Administration.
No Limit on Eligible Lender Participation. There is no limit on the amount of participations the Main Street SPV can purchase from a single Eligible Lender.
Additional Main Street SPV and Federal Reserve Information
Sale to Main Street SPV. Eligible Lender may extend the eligible loan or upsized tranche to an Eligible Borrower and sell the corresponding participation in that eligible loan to the Main Street SPV at par value. All such sales will be structured as “true sales” and must be completed expeditiously after the origination of the eligible loan. The loan sale documentation will be made available separately by the FRB.
Loss Sharing. The Main Street SPV and the Eligible Lender would share in any losses on the eligible loan on a pari passu basis. For the MSELF upsized tranche, any collateral that secures the underlying loan must secure the upsized tranche on a pro rata basis.
Information Collection and Disclosure. As part of the MSLP, the FRB will disclose information regarding names of lenders and borrowers, amounts borrowed and interest rates charged. Under Section 11(s) of the Federal Reserve Act, the FRB will also disclose information concerning the MSLP facilities one year after the effective date of the termination by the FRB of the authorization of the MSLP facilities. This disclosure will include names and identifying details of each participant in the MSLP facilities, the amount borrowed, the interest rate or discount paid, and information concerning the types and amounts of collateral pledged or assets transferred in connection with participation in the MSLP facilities.
The Main Street SPV will collect information on certifications, covenants, lender, loan terms, and loan performance as well as the borrower, borrower fundamentals, collateral, and other characteristics. The information will be used to verify that the lender, loan, and borrower meet eligibility requirements and to support ongoing accounting and credit risk monitoring needs with respect to purchased loan participations. Information will be collected at different stages and at appropriate frequencies through a variety of channels designed to accommodate the range of Eligible Lenders and Eligible Borrowers anticipated to participate in the program. The FRB indicated that more details will be provided at a later date.
Next Steps for Eligible Borrowers
To ultimately obtain a loan under the MSLP, an Eligible Borrower must submit an application and any other documentation required by an Eligible Lender to such Eligible Lender. Practically, an Eligible Borrower should contact its existing lender to determine if it will be participating and whether it has an application process.
Updates regarding the MSLP, including the official launch date and the date at which the Main Street SPV will begin purchasing participation interests in MSNLF loans, MSPLF loans and MSELF upsized tranches, will be made available the FRB’s MSLP page, which currently includes Frequently Asked Questions and individual term sheets for the MSNLF, the MSPLF and the MSELF.
We will continue to provide you with updates on the status of the MSLP as they become available.
This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.
[i] “Ineligible Businesses” are listed in 13 CFR 120.11(b)-(j), (m)-(s), as modified and clarified by the Small Business Administration (“SBA”) regulations for purposes of the Paycheck Protection Program (“PPP”) on or before April 24, 2020. Such modifications and clarifications include the SBA’s recent interim final rules available at 85 Fed. Reg. 20811, 85 Fed. Reg. 21747, and 85 Fed. Reg. 23450. The FRB may further modify the application of these restrictions to the MSLP.
[ii] The affiliated entities of a Business should be determined in accordance with the affiliation test set forth in 13 CFR 121.301(f) (1/1/2019 ed.) (the “2019 Affiliation Rules”).
[iii] 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, which provides that a 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 12 months prior to the origination or upsizing of the MSLP loan.
[iv] A Business may use its (and its affiliates’): (a) annual “revenue” per its 2019 audited financial statements in accordance with generally accepted accounting principles (GAAP) or (b) annual receipts for the fiscal year 2019, as reported to the Internal Revenue Service. For purposes of the MSLP, the term “receipts” has the same meaning as 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.
[v] The FRB established the PMCCF to support large companies through the purchase of eligible corporate bonds from, and lending through syndicated loans to, large companies. PMCCF loans are not forgivable.