The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides emergency economic stimulus to small businesses and certain eligible recipients in response to the economic distress caused by the COVID-19 pandemic. The Coronavirus Economic Stabilization Act of 2020 (CESA), at Title IV, Subtitle A of the CARES Act, authorizes the Secretary of the Treasury to, among other things, establish and administer a program of loans, loan guarantees, and other investments to provide liquidity to eligible businesses related to losses incurred as a result of coronavirus. On April 9, 2020, pursuant to CESA and Section 13(3) of the Federal Reserve Act, the Federal Reserve and the U.S. Treasury Department approved the establishment of a $600 billion Main Street Business Lending Program. This update summarizes the terms of the Main Street Business Lending Program, and outlines certain matters to be analyzed and considered with respect thereto.

Main Street Lending Program

On April 9, 2020, the Federal Reserve published term sheets for two new emergency-lending facilities under the Main Street Lending Program (MSLP):

• Main Street New Loan Facility (MSNLF). The Federal Reserve will purchase new unsecured term loans originated on or after April 8, 2020, made by Eligible Lenders to Eligible Borrowers.
• Main Street Expanded Loan Facility (MSELF). The Federal Reserve will purchase upsized tranches of existing loans originated before April 8, 2020, made by Eligible Lenders to Eligible Borrowers.

Program Basics

• Eligible Lenders: U.S. insured depository institutions, U.S. bank holding companies, and U.S. savings and loan holding companies.  Non-bank lenders are currently not eligible to participate in the MSLP.
• Eligible Borrowers:
  • Businesses with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues.
  • Businesses 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.
• Participation Criteria: Eligible Borrowers:
  • may participate in the MSNLF or MSELF, but not both.
  • that participate in the MSNLF or MSELF may not also participate in the Primary Market Corporate Credit Facility.
  • participating in the MSNLF or MSELF may have also received a loan under the Paycheck Protection Program.
• Mechanics; Risk Sharing: A single special purpose vehicle (SPV) will be established to finance loans made by Eligible Lenders to Eligible Borrowers. The SPV will purchase a 95% participation in an Eligible Loan at par value, and the Eligible Lender will retain (a) 5% of the Eligible Loan in the case of a MSNLF or (b) 5% of the upsized tranche of each Eligible Loan in the case of a MSELF. The SPV and the Eligible Lender will share risk on a pari passu basis.
• Term: The SPV will cease purchasing participations in Eligible Loans on September 30, 2020, unless the Board and the Treasury Department extend the MSNLF. The Reserve Bank will continue to fund the SPV after such date until the SPV’s underlying assets mature or are sold.

Loan Terms and Fees

Certifications

• Borrower: An Eligible Borrower must certify, among other things, with respect to the new loan or the upsized tranche, as applicable:
  • It is eligible to participate in the MSLP, including in light of the conflicts of interest prohibition in Section 4019(b) of the CARES Act.
  • It requires financing due to the exigent circumstances presented by the coronavirus disease 2019 (COVID-19) pandemic, and that, using the proceeds of the Eligible Loan, it will make reasonable efforts to maintain its payroll and retain its employees during the term of the Eligible Loan.
  • It meets the EBITDA leverage condition stated above.
  • It will follow compensation, stock repurchase, and capital distribution restrictions that apply to the direct loan programs under Section 4003(c)(3)(A)(ii) of the CARES Act (under the CARES Act, these restrictions apply for a period of one year after loan repayment).
  • It will refrain from using the proceeds of the Eligible Loan or upsized tranche, as applicable, to repay other loan balances.
  • It will refrain from repaying other debt of equal or lower priority, with the exception of mandatory principal payments, unless it has first repaid the Eligible Loan or upsized tranche, as applicable, in full.
  • It will not seek to cancel or reduce any of its outstanding lines of credit with the Eligible Lender or any other lender.
• Lender: An Eligible Lender will be required to certify that, among other things, the following:
  • It is eligible to participate in the MSLP, including in light of the conflicts of interest prohibition in Section 4019(b) of the CARES Act.
  • The proceeds of the Eligible Loan will not be used to repay or refinance pre-existing loans or lines of credit made by the Eligible Lender to the Eligible Borrower.
  • It will not cancel or reduce any existing lines of credit outstanding to the Eligible Borrower.

Considerations

• EBITDA: The Federal Reserve has not provided guidance on how EBITDA will be calculated. Since a borrower will oftentimes negotiate an “adjusted” definition of EBITDA with their lender, it remains to be seen if Eligible Borrowers will be permitted to use a non-GAAP definition of EBITDA that includes negotiated add-backs when calculating the loan amount for a MSNLF or MSELF. Highly leveraged borrowers may be negatively impacted if they are required to calculate the loan amount based on “unadjusted” EBITDA.
• Existing Indebtedness: The MSLP requires Eligible Borrowers refrain from repaying other debt of equal or lower priority, with the exception of mandatory principal payments, unless they have first repaid the Eligible Loan or upsized tranche, as applicable, in full. Eligible Borrowers should review existing credit agreements to determine the restrictions on incurrence of debt and prohibitions on negative pledges, and assess the need to obtain payment subordination agreements from existing creditors or take other steps to ensure compliance with this requirement.
• SOFR: As noted above, MSNLF and MSELF loans are priced based on SOFR plus a margin. The Federal Reserve’s Alternative Reference Rate Committee has selected SOFR as the index that will replace U.S. dollar LIBOR when LIBOR is discontinued in 2021. Using SOFR as the index for pricing MSNLF and MSELF loans may present challenges for borrowers or lenders who have not previously used SOFR and, in the case of upsized tranches, may create administrative issues if the existing credit facility is priced using LIBOR as the index.
• Application; Documentation: Standard forms of MSLP Loan Application and loan documents have not been issued by the Federal Reserve or U.S. Treasury Department.
• Federal Reserve Rights: As the MSLP is currently structured, the SPV will own a majority (i.e., 95%) interest in loans originated under the MSNLF and upsized tranches originated under the MSELF. The MSLP does not address the Federal Reserve’s approval rights for the loans and tranches to be purchased by the SPV, nor does it specify what, if any, continuing consent or approval rights may be exercised by the Federal Reserve as owner of a majority interest in these loans and tranches. The level of participation and control that the Federal Reserve will ultimately exert remains with respect to these loans to be seen, but if such participation and control is significant, it may make it challenging for both lenders and borrowers to structure and administer these loans (including the ability to facilitate renewals, amendments, and waivers).

More to Come

The Board of Governors of the Federal Reserve System and Secretary of the Treasury has reserved the right to make adjustments to the terms and conditions summarized above.

The MSLP is still being finalized, and the Federal Reserve has solicited input from lenders, borrowers, and other stakeholders until April 16, 2020.