The Federal Reserve established the Main Street Lending Program (“Program”) to support lending to small and medium-sized businesses in response to the economic impact of the COVID-19 pandemic. The availability of additional credit is intended to help businesses that were in sound financial condition prior to the onset of the COVID-19 pandemic maintain their operations and payroll until economic activity normalizes. Further, the Federal Reserve designed the Program to support small and medium-sized businesses that were either unable to access the Paycheck Protection Program (“PPP”) or that require additional financial support after receiving a PPP loan. (Burns & Levinson’s most recent PPP Advisory can be found here.)
The Federal Reserve Bank of Boston (“FRB of Boston”) has created a special purpose vehicle (“SPV”) to purchase 95% of participations in loans originated under this program by eligible lenders. In total, the Main Street SPV will purchase up to $600 billion of participations in eligible loans, so potential borrowers should be aware that there is limited availability under the Program. To note, the Main Street SPV will stop purchasing loan participations on September 30, 2020, unless the Program is extended by the Federal Reserve Board and the Treasury Department. The FRB of Boston will continue to operate the SPV after such date until the Main Street SPV’s assets mature or are sold.
On July 6, the FRB of Boston announced that the Main Street Lending Program is now fully operational.
There are three different facilities, or options, available to potential borrowers under the Program, of which a borrower can only select one alternative:
(1) the Main Street New Loan Facility (“MSNLF”),
(2) the Main Street Priority Loan Facility (“MSPLF”), and
(3) the Main Street Expanded Loan Facility (“MSELF”).
For additional information on any topics described below, please see the Main Street Lending Program’s Frequently Asked Questions here. For additional information on the MSNLF, please see the Main Street New Loan Facility Term Sheet, the MSPLF, please see the Main Street Priority Loan Facility Term Sheet, and the MSELF, please see the Main Street Expanded Loan Facility Term Sheet.
Potential borrowers should independently evaluate each of these three options in light of their unique financial circumstances In addition, these Program loans are not subject to forgiveness, and will be accordingly managed by lenders as indebtedness, and thus borrowers should carefully consider the Program lender, its responsiveness and reputation, previous relationship with the borrower or management, and other related factors. This is especially relevant as each lender is expected to conduct an assessment of each potential borrower’s financial condition at the time of the potential borrower’s application and apply their own underwriting standards in evaluating such condition and creditworthiness. The preliminary list of lenders who have elected to participate can be found here, which we expect will be updated over time as lenders join the Program.
Program Assessment Process. The general process a potential borrower would follow is to first confirm that it is eligible and then interact with and assess potential Program lenders as noted above. Borrower would then work with the lender to determine the appropriate Program loan based on the circumstances, qualifications, reporting, and affirmative and negative covenants and proceed with loan documentation. Borrowers with existing debt would need to review existing debt facilities to see if consents or modifications are required to ensure compliance with the Program requirements and existing debt documentation.
Borrower Eligibility. Eligible borrowers must generally meet the following minimum conditions. However, even if eligible thereunder, the loan is still subject to lender underwriting review as to borrower’s financial condition and related matters:
- Be solvent;
- Had certain minimum positive 2019 EBITDA;
- Been established prior to March 13, 2020;
- Created or organized in the United States or under the laws of the United States and that have significant operations in and a majority of its employees based in the United States;
- Either have 15,000 or fewer employees, or 2019 revenues of $5 billion or less; and
- Be unable to secure adequate credit accommodations from other banking institutions (guidelines have confirmed this does not mean that no credit from other sources is available to the borrower, rather the borrower may certify that it is unable to secure “adequate credit accommodations” because the amount, price, or terms of credit available from other sources are inadequate for the borrower’s needs during the current unusual and exigent circumstances).
Certain companies may be prohibited from obtaining Program loans or may have difficulty becoming eligible based on the other eligibility criteria and exclusions including:
- Similar to PPP loans, certain companies, including finance business, remain ineligible in accordance with SBA ineligibility rules listed in 13 CFR 120.110(b)-(j) and (m)-(s);
- Similar to PPP loans, the SBA’s affiliation rules regarding control will apply when determining eligibility, including the employment and revenue thresholds, and as such certain private equity and venture capital-backed controlled companies may be ineligible;
- Businesses that have historically borrowed based on recurring revenues may have a difficult time accessing the Program facilities since EBITDA is the key underwriting metric for determining the size of the required for the MSNLF, MSPLF, and MSELF facilities; and
- Pursuant to Section 4002(4) of the CARES Act, a business is prevented from participating in the Program if it has already received adequate economic relief in the form of loans or loan guarantees as provided under the Coronavirus Economic Stabilization Act of 2020 (Subtitle A of Title IV of the CARES Act) (as noted above this does not relate to PPP loans so a borrower can obtain both a PPP loan and a Program loan). Consistent with this restriction, businesses receiving “specific support” pursuant to section 4003(b)(1)-(3) of the CARES Act are not eligible for the Program. As a matter of practice, the credit risk of asset-based borrowers is generally not evaluated on the basis of EBITDA, and so the Federal Reserve and the Treasury Department are currently evaluating the feasibility of adjusting the Program’s loan eligibility metrics for such borrowers.
Loan Underwriting. The eligibility conditions described above and in the term sheets contains just the minimum requirements for the Program. As noted above, the loan and borrower’s financial condition must also pass muster under the lender’s internal underwriting standards. This should be factored in when assessing the lenders with whom the application will be submitted.
Can I use the Program to Refinance Existing Debt? While each of the Program’s three facilities are similar as described below, one of the extremely important distinctions, and key benefit that many potential borrowers will be interested in, is that under the MSPLF, borrowers can use the proceeds to refinance debt with existing lenders that are not providing the Program loan. The debt being refinanced may be a term or revolving loan, but the MSPLF Loan is a term loan only once provided.
Who will be Servicing the Program Loan? The Program lender will service each loan directly with the borrower in accordance with the loan documents unless and until the SPV elevates its interest and role which it cannot do absent certain circumstances, which include borrower and lender consent, mandatory payments being missed, or borrowing being involved in bankruptcy/insolvency proceedings. The Program lender will be expected to handle such servicing role in accordance with standards of care established in the agreements to be entered into between the SPV and the lender, which generally are intended for the lender to exercise the same duty of care in approaching such proceedings as it would exercise if it retained a beneficial interest in the entire loan.
Collateral. MSNLF loans, MSPLF loans, and MSELF upsized tranches may be secured or unsecured. Note that:
- The MSPLF loan may be unsecured only if the borrower does not have, on the date of origination, any other secured loans or debt instruments (other than mortgage debt). If the MSPLF Loan is secured by the same collateral as any of the borrower’s other loans (other than mortgage debt), the lien upon such collateral securing the MSPLF Loan must be and remain senior to or pari passu with the lien(s) of the other creditor(s) upon such collateral. The MSPLF Loan need not share in all of the collateral that secures the Borrower’s other loans. If secured, there is a collateral coverage ratio that must be met at origination.
- An MSELF upsized tranche must be secured if the underlying loan is secured. In such case, any collateral securing the underlying loan (at the time of upsizing or on any subsequent date) must secure the MSELF upsized tranche on a pari passu basis. Eligible Lenders can require borrowers to pledge additional collateral to secure an MSELF upsized tranche as a condition of approval.
Additional Loan Terms. Each of the MSNLF, MSPLF, and MSELF loan facilities contain many of the same features such as:
- the same eligible lender and eligible borrower criteria,
- 5-year maturity,
- 2-year principal deferral,
- 1-year interest deferral,
- variable interest at LIBOR (1 or 3 month) + 300 basis points,
- principal amortization of 15% at the end of the third year, 15% at the end of the fourth year, and a balloon payment of 70% at maturity at the end of the fifth year,
- prepayment without penalty,
- requirement to make commercially reasonable efforts to maintain payroll and retain employees during the time the loan is outstanding,
- aside from the refinance allowance for MSPLF loans, refraining from repaying the principal balance of, or paying any interest on, any debt until the Program loan is repaid in full, unless the debt or interest payment is mandatory and due,
- origination fees paid to the eligible lender, being up to 100 basis points of the principal amount of the loan at the time of origination for each of the MSNLF and MSPLF, and up to 75 basis points of the principal amount of the upsized tranche at the time of upsizing for the MSELF, and
- certain borrower certifications and covenants, which can be located on page 3 of each of the term sheets for which links are included above.
The key differences among the three facilities concern the minimum/maximum loan sizes, reporting and priority requirements, as well as the ability of borrower to refinance debt using the MSPLF. The loan types also differ in how they interact with the eligible borrower’s existing outstanding debt, including with respect to the level of pre-pandemic indebtedness an eligible borrower may have incurred.
MSNLF. Under the facility, the Lender will extend a new five-year term loan to the Borrower ranging in size from $250,000 to $35 million. The maximum size of a loan made in with the MSNLF cannot, when added to the Eligible Borrower’s existing outstanding and undrawn available debt, exceed four times the Eligible Borrower’s adjusted 2019 EBITDA. It is important to note that the portion of any outstanding PPP loan that has not yet been forgiven should be counted as outstanding debt for the purposes of the Program. An MSNLF Loan, at the time of origination or at any time during its term, may not be contractually subordinated in terms of priority to the Eligible Borrower’s other loans or debt instruments. Therefore, an MSNLF Loan may not be junior in priority in bankruptcy to the Eligible Borrower’s other unsecured loans or debt instruments. However, prohibitions on contractual subordination with respect to Program loans do not prevent the incurrence of obligations that have mandatory priority under the Bankruptcy Code or other insolvency laws. In any event, a Borrower may take on new secured or unsecured debt after receiving an MSNLF Loan, provided the new debt would not have higher contractual priority in bankruptcy than the MSNLF Loan.
MSPLF. Under this facility, the Lender will extend a new five-year term loan to the Borrowers ranging in size from $250,000 to $50 million. The maximum size of a loan made in connection with the MSPLF cannot, 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 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. However, Borrowers are permitted, at the time of origination of the loan, to refinance existing debt owed by the Eligible Borrower to a lender that is not the Eligible Lender.
MSELF. Under this facility, a Lender that has extended an existing term loan or revolving credit facility to a Borrower may increase (or “upsize”) that extension of credit, by adding a new increment (or “tranche”). The MSELF, or upsized tranche, is a five-year term loan ranging in size from $10 million to $300 million. The maximum size of a loan made in connection with the MSELF cannot, when added to the Borrower’s existing outstanding and undrawn available debt, exceed six times the Borrower’s adjusted 2019 EBITDA. To be eligible for “upsizing,” 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. To ensure that the Borrower was in sound financial condition prior to the onset of the pandemic, the existing loan or revolving credit facility must have had a risk rating, based on the Lender’s internal rating system, equivalent to a “pass” in the FFIEC’s supervisory rating system as of December 31, 2019. With respect to priority and security, at the time of upsizing and at all times thereafter, the upsized tranche must be senior to or pari passu with the Borrower’s other loans or debt instruments, other than mortgage debt.
Limitations on Use of Proceeds. It is important to note that the CARES Act’s restrictions on compensation, stock repurchases, and capital distributions apply to loans made under the Program. Other than tax distributions, loans may not be used for the payment of dividends or making of capital distributions with respect to any of the borrower’s common stock while the loan is outstanding and for a period of 12 months thereafter. Moreover, borrowers are prohibited from repurchasing any of its equity securities (including those of its parent company) during the same period, except as required by existing contractual obligations. As of now, the Federal Reserve has not provided further guidance on these restrictions or on any other potential distribution exemptions. Depending on a borrower’s unique structure there may be other ordinary course distributions that would not be permitted under the existing guidelines.
Chad Porter is a partner in Burns & Levinson’s Finance, Middle-Market M&A and Private Equity, Securities Law, and Business & Transactions groups. He specializes in mergers and acquisitions, commercial financing arrangements, private equity investments and transactions, securities transactions and compliance, general business affairs, and business disputes. He can be reached at firstname.lastname@example.org or 617.345.3686.
Marcus Hernandez is an attorney at Burns & Levinson who focuses his practice on general corporate, finance, mergers & acquisitions, securities, start-up structuring and financing, venture capital and private equity matters. He has experience drafting, reviewing and negotiating corporate contracts, as well as working with entrepreneurs to establish their business presence and obtain early round and subsequent financing. He can be reached at email@example.com or 617.345.3371.